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1. Saboba Ltd (Saboba) manufactures plastic water tanks for the farming industry. On 31 May
2018, its closing inventory consisted of 950kg of plastic resin raw material, and also 250 finished
units (plastic water tanks). Further information is provided as follows:
I.
) Plastic: The purchase price of plastic resin was GH¢3 per kg throughout the year to 31
May 2018, plus an additional GH¢0.50 per kg of delivery cost. Saboba has a policy of
always keeping plenty of plastic resin in inventory, as its supply can be unreliable.
However, close to the year-end, the price of plastic resin reduced due to supply
exceeding demand. The purchase price of Saboba’s raw material is now GH¢2.10 per kg
plus the GH¢0.50 per kg delivery charge. The existing inventory of plastic resin can be
sold in the market for GH¢1.80 per kg net of all costs.
II.
Tanks: Each tank requires 10 kg of plastic to manufacture, and each unit incurs GH¢25 in
conversion costs (labour and overhead). Saboba sells the tanks for GH¢100. It is
expected that this price will drop to GH¢90 as a result of the fall in the market price of
plastic. All completed units sold by Saboba incur a GH¢6 selling and distribution cost.
Required: Calculate the value of closing inventory in the books of Saboba Ltd at 31 May 2018 applying
the principles of IAS 2: Inventories
SUGGESTED ANSWER
a) The inventory of Saboba Ltd should be valued as follows:
Finished goods:
Cost per unit:
GH¢
Material – 10kg *GH¢3
30
Conversion
25
Total
55
Net realisable value:
Expected selling price
90
Less selling costs estimate (6)
Net realisable value
84
As the Net Realisable Value exceeds the cost, the finished goods are valued in the books at cost.
Hence a value of 250 *GH¢55 =GH¢13,750 will be entered into the books as closing inventory of
finished goods.
Raw Material:
Cost per unit:
Purchase price
Delivery costs
Total cost
ANTHONY EDUAH
GH¢
3.00
0.50
3.50
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Net realisable value:
Expected sale proceeds if sold as inventory
1.80
Expected sale proceeds if sold as finished units
90
Less selling cost
(6)
Less completion costs: Conversion
(25)
Net realisable value
59
NRV per kg of raw material
GH¢5.90
The NRV of the raw material if sold as raw material is lower than the cost. However the NRV if
processed into finished units is higher than cost. Therefore the inventory should not be written
down, and should be recorded in the books at cost. Hence a value of 950 *GH¢3.50 =GH¢3,325
will be entered into the books as closing inventory. Total closing inventory = 3,325 + 13,750
=GH¢17,075.
QUESTION TWO
Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of
GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be
impaired due to a change in use. An impairment test conducted on 31 December 2017, revealed
its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate
an annual net income of GH¢2 million for the next three years at which point the asset would be
sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20%
on reducing balance method on machinery.
Note:
• The present value of ordinary annuity of GH¢1 at 10% for one year, two years and three years
are 0.909,1.736 and 2.487 respectively.
• The present value of GH¢1 at 10% for one year, two years and three years 0.909, 0.826 and
0.751 respectively
Required: In accordance with IAS 36: Impairment of Assets, explain with justification the
required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31
December 2017.
SUGGESTED ANSWER
Under IAS 36 Impairment, The machinery needs to be tested for impairment.
GH¢m
Carrying value
11
Recoverable amount (GH¢2 x 2.4868) + (GH¢2.4 x 0.7513)
(6.8)
Impairment
4.2
Recoverable amount is the higher of value in use (GH¢6.8m) and fair value less costs of disposal
(GH¢5m)
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GH¢m
Cr (PPE)
Dr SPLOCI - Serox
GH¢m
4.2
4.2
QUESTION 3
Kumbungu Group owns a number of freehold properties throughout Northern Region. Three of
these properties are rented out under annual contracts, the details of which are as follows:
Property
1
2
3
Life
50 years
40 years
15 years
Cost
GH¢’000
200
180
150
Value at 31/12/2017
GH¢’000
275
240
175
Value at 31/12/2018
GH¢’000
225
210
180
All three properties were acquired on 1 January 2017, and their valuation is based on their age
at the date of the valuation. Property 1 is let to a subsidiary (60% ownership) of Kumbungu on
normal commercial terms, while Property 2 and Property 3 are let on normal commercial terms
to companies that are not related to Kumbungu.
Kumbungu adopts the fair value model of accounting for investment properties in accordance
with lAS 40: Investment Properties and the benchmark treatment for owneroccupied properties
in accordance with lAS 16: Property, Plant and Equipment. Annual depreciation, where
appropriate, is based on the carrying value of assets at the beginning of the relevant accounting
period.
Required: Prepare extracts for the consolidated income statement of Kumbungu for the year
ended 31 December 2018 and the consolidated statement of financial position as at that date in
respect of the above properties.
SUGGESTED ANSWER
Property 1 is let to another group entity. From a group perspective, this property is not an
investment property, as defined by IAS 40, and must therefore be accounted for in accordance
with IAS 16. Properties 2 and 3 are investment properties and are accounted for in accordance
with the fair value model of measurement set out in IAS 40
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Kumbungu
Consolidated statement of financial position as at 31 December 2018 (Extract)
Non-current assets
PPE (Property 1)
Investment property 2
Investment property 3
Cost/valuation
GH¢’000
200
210
180
Acc Depreciation
GH¢’000
[2 years] (8)
-
NBV
GH¢’000
192
210
180
Kumbungu Consolidated Income Statement for the year ended 31 December 2018 (Extract)
Depreciation [Property 1]
Deficit in fair value of investment property 2 [240 – 210]
Surplus in fair value of investment property 3 [175 – 180]
GH¢’000
(4)
(30)
5
QUESTION 4
Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in
compliance with IFRSs and has a reporting date to 31 December. During the year to 31
December 2020, Marshall entered into a contract with a customer to manufacture and sell some
goods such that the goods will be delivered (control of the goods vests with the customer) in
two years. The contract has two payment options:
i)
ii)
The customer can pay GH¢500,000 when the contract is signed or
GH¢650,000 in two years when the customer gains control of the goods. Marshall's
incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January
2020, when the contract was signed. Marshall intends to recognise revenue on this
contract in the financial statements.
Required: In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting
calculations) how Marshall should account for the above transactions for years 2020 and 2021.
ANTHONY EDUAH
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SUGGESTED ANSWER
IFRS 15 requires revenue to be recognised as each performance obligation is satisfied. An entity satisfies
a performance obligation by transferring control of a promised good or service to the customer, which
could occur over time or at a point in time.
In this contract, Marshall undertakes to transfer control of the goods in two years. Hence, performance
obligation has not been satisfied, and revenue cannot be recognised.
The customer has made an advance payment of GH¢500,000 for goods to be delivered in 2 years. This
represents a liability (revenue received in advance) and has a significant financing component.
For the year to 31 December 2020, Marshall would recognise a finance cost of GH¢50,000 (500,000 x
10%) and a liability in the statement of financial position of GH¢550,000 (GH¢500,000 + GH¢50,000).
For the year to 31 December 2021, Marshall would recognise a finance cost of GH¢55,000 (550,000 x
10%) and a liability in the statement of financial position of GH¢605,000 (GH¢550,000 + GH¢55,000).
QUESTION 5
Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due to
failure in its technology on 1 January 2018. As a result, the following carrying amounts were recorded in
the books immediately before the impairment test.
GH¢million
Goodwill
20
Technology
5
Equipment
10
Land
50
Buildings
30
Other net assets
40
The value in use of the unit is estimated at GH¢85 million, and Kwik has received an offer of GH¢75
million for the unit. The technology is worthless, following its complete failure. Other net assets include
inventory, receivables and payables. It is considered that the carrying amount of other net assets is a
reasonable representation of its net realisable value.
Required: In accordance with IAS 36: impairment of assets, show the accounting treatment for the
above transactions.
SOLUTION
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SUGGESTED ANSWER
Asset
Carrying Amount
GH¢
Goodwill
Technology
Equipment
Land
Building
Other Net Assets
20
5
10
50
30
40
155
Amount to be written
off
GH¢
20
5
5
25
15
0
70
Amount to be report in
S.O.F.P
GH¢
0
0
5
25
15
40
85
Working 1
Allocation of Impairment
GH¢ million
Total impairment (155-85)
70
Technology ( It was declared worthless)
(5)
Goodwill
(20)
Net to be allocated
45
Working 2
Pro-rate base on the carrying amount
Equipment 45 x 10/(10+50+30)
5
Land
45 x 50/(10+50+30)
25
Building
45 x 30/(10+50+30)
15
Other net assets
0
45
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QUESTION 6
Tanoso owns the following properties as at 31 December 2015:
Property:
Fair value (GH¢million)
Land with future use undetermined
3.2
Factory rented to Tanoso's subsidiary under an operating lease
2.4
10 floor office building (fair value is equal per floor) with 3 floors used as the subsidiary's head office and
seven floors rented to third parties under an operating lease.
15.0
Empty building held for capital appreciation, but not leased out.
4.1
Tanoso's accounting policy is to hold its investment properties under the fair value model and its land
and buildings under the revaluation model.
Required:
In accordance with IAS 40 Investment Property calculate the carrying amount to be recognised as
investment property in Tanoso's consolidated financial statements as at 31 December 2015.
SUGGESTED ANSWER
GHS'm
Land with future use undetermined
– capital appreciation by default (IAS 40 para 8(b))
3.2
Factory rented to Tanoso's subsidiary under an operating lease
– treated as owner occupied in the consolidated financial statements
– 10 floor office building – proportional approach is valid (10 x 7/10 x 1.5m)
10.5
Empty building held for capital appreciation, but not let
– investment property is for capital appreciation and/or rental income
4.1
17.8
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QUESTION 7
Sofoline Ltd has a plant which cost GH¢40,000 and was purchased on 1 January 2013 with a useful life of
10 years. The plant was being used as part of its business operating capacity. On 30 June 2015, Sofoline
Ltd made a decision to classify the plant as held for sale and an agent was appointed for the sale of the
plant that have started advertising the plant at a selling price of GH¢29,000 which was considered to be
its fair value. The selling expenses are estimated to be GH¢1,500. The asset has not yet been sold by the
year end of 31 December 2015 and it has a fair value less cost to sell of GH¢24,000 on this date.
Required: Discuss how this will be accounted for in the financial statements of Sofoline Ltd for the year
ended 31 December, 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.
SUGGESTED ANSWER
As the plant appears to have met the criteria to be classified as held for sale on 30 June 2015, it will be
classified as held for sale on 30 June 2015 at lower of: Carrying value on the date of classification Its fair
value less cost to sell on the same date
Working (31/12/2015)
GHS
Cost
40,000
Less Accumulated Dep. (GHS40,000/10 years) × 2
(8,000)
Carrying value at 1.1.2015
32,000
Less Current Yr. Dep. (6 months) (GHS4,000 × 6/12)
(2,000)
Carrying value at 30.6.2015
30,000
Impairment loss at 30.6.2015
(2,500)
Fair value less cost to sell at 30.6.2015 (GHS29,000 - GHS1,500)
27,500
Further impairment loss at 31.12.2015
(3,500)
Fair value less cost to sell at 31.12.2015
24,000
If fair value less cost to sell is lower than the carrying value of asset on the date of classification the
difference will be impairment loss.The asset classified as held for sale is not depreciated after being
classified as held for sale.The asset will be presented separately from other assets, as a separate line
item in the statement of financial position under current assets at GHS24,000.
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QUESTION 8
Akakpo Ltd obtained a license free of charge from the government to dig and operate a gold mine.
Akakpo Ltd spent GH¢6 million digging and preparing the mine for operation and erecting buildings on
site. The mine commenced operations on 1 September 2014. The license requires that at the end of the
mine’s useful life of 20 years, the site must be reclaimed, all buildings and equipment must be removed
and the site landscaped. At 31 August 2015, Akakpo Ltd estimated that the cost in 19 years’ time of the
removal and landscaping will be GH¢5 million and its present value is GH¢3 million.
On 31 October 2015, there was a massive earthquake in the area and Akakpo Ltd’s mine shaft was badly
damaged. It is estimated that the mine will be closed for at least six months and will cost GH¢1 million to
repair.
Required:
I.
II.
Demonstrate how Akakpo Ltd should record the cost of the site reclamation as at 31 August
2015 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Explain how Akakpo Ltd should treat the effects of the earthquake in its financial
statements for the year ended 31 August 2015 in accordance with IAS 10 Events after the
Reporting Period.
SUGGESTED ANSWER
I.
IAS 37 Provisions, contingent liabilities and contingent assets requires that future costs of
reinstatement be provided for as soon as they become an unavoidable commitment. The
mine’s license requires the work to be done, so there is a commitment as soon as the mine
starts operations. The present value of the full cost must be provided for. GH¢ 3 million will
be credited to provisions and added to the cost of the non-current asset
II.
The earthquake occurred after the end of the accounting period. Assets and liabilities at 31
August 2014 were not affected. The earthquake is indicative of conditions that arose after
the reporting period and does not give any further evidence in relation to assets and
liabilities in existence at the reporting date. Therefore according to IAS 10 Events after the
reporting period it will be classified as a non-adjusting event after the reporting period. The
cost of the repairs will be charged to the Statement of comprehensive income in the period
when it is incurred. Due to the impact on Akakpo Ltd, i.e. closure and loss of earnings for 6
months, the earthquake and an estimate of its effect will need to be disclosed by way of a
note in Akakpo Ltd’s financial statements for the year ended 31 August 2015.
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QUESTION 9
The following costs were incurred in 2016 in the design and construction of a new office building over a
nine-month period during 2016:
GH¢000
Feasibility study
8
Architects' fees
100
Site clearance (by external demolition professionals)
80
Construction materials
600
Cost of own inventories used in the construction
(net realisable value if sold outside the company GH¢24,000)
Internal construction staff salaries during period of construction
External contractor costs
30
360
2,400
Income from renting out part of site as storage
depot during early phase of construction
(12)
3,566
Required:
In accordance with IAS 16 Property, plant and equipment, calculate the amount that should be
capitalised as property in the financial statements for the year ending 31 December 2016.
SUGGESTED ANSWER
GH¢’000
Feasibility study
–
expensed by analogy with SIC-32 para 2(a)/9(a) in accordance with IAS 8 para 11(a) –
Architects’ fees (IAS 16 para 17(b))
100
Site clearance (IAS 16 para 17(b))
80
Construction materials
600
Cost of own inventories used in the construction (IAS 2 is applied first before use on the project) 24
Internal construction staff salaries (IAS 16 para 17(a))
360
External contractor costs
ANTHONY EDUAH
2,400
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ANTHONY EDUAH
Income from renting out part of the site as storage depot during early phase of construction (IAS 16 para
21)
3,564
QUESTION 10
Atta Kay Ltd has the following assets which it would like to classify under IFRS 5 Non-current Assets Held
for Sale and Discontinued Operations today
Investment properties
(at fair value through
profit or loss)
Land used as company
car park (held under
the revaluation model)
Trade Receivables
Plant (held under the
cost model)
Carrying Amount
today (GH¢million)
62.3
Open market value
today (GH¢million)
Estimated selling costs
(GH¢million)
30.9
0.5
49
50.5
1.0
10
1.0
0.5
28
14
Required:
Calculate the carrying amount of assets that can be classified as held for sale (assuming the relevant
criteria are met where appropriate), after applying the measurement rules of IFRS 5.
SUGGESTED ANSWER
Non-current assets held for sale
(GH¢m)
Investment properties held at fair value through profit or loss are outside the scope of IFRS 5 0
Land (the land is held under the revaluation model and so is
first revalued to fair value (50.5) before applying
IFRS 5: lower of (revised) carrying amount (49) and fair value
less costs to sell (49.5))
ANTHONY EDUAH
49.0
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ANTHONY EDUAH
Trade receivables – outside scope of IFRS 5
0
Plant (lower of carrying amount (14) and fair value less costs to sell (9.5))
9.5
58.5
QUESTION 11
Esinam Ltd has the following products in inventory at the end of 2016:
Units
Cost per unit GH¢
Ahomka (completed)
5,400
22
Adonko (part complete)
2,800
26
Each product normally sells at GH¢34 per unit. Due to the difficult trading conditions, Esinam Ltd intends
to offer a discount of 15% per unit and expects to incur GH¢4 per unit in selling costs. GH¢10 per unit is
expected to be incurred to complete each unit of Adonko. Required: In accordance with IAS 2
Inventories, at what amount should inventory be stated in the financial statements of Esinam Ltd as at
31 December 2016?
SUGGESTED ANSWER
No.
Cost
NRV
GH¢
Ahomka
5,400
22
34*0.85=28.9-4=24.9
118,800
Adonko
2,800
26
34*0.85=28.9-4-10=14.9
41,720
160,520
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QUESTION 12
Ayariga Ltd acquired its head office on 1 January 2007 at a cost of GH¢10 million (excluding land). The
company’s depreciation policy is to depreciate property over 50 years on a straight line basis. Estimated
residual value is zero.
On 31 December 2011, Ayariga Ltd revalued the non-land element of its head office to GH¢16 million. In
accordance with IAS 16 Property, Plant and Equipment the company has decided not to transfer annual
amounts out of revaluation reserves as assets are used. In January 2017 storm damage occurred and the
recoverable amount of the head office property (excluding land) was estimated at GH¢5.8 million.
Required:
In accordance with IAS 36 Impairment of Assets, recommend (with workings) how the above
transaction should be accounted for as at 1 January, 2017.
SUGGESTED ANSWER
IAS 36 and IAS 16 require that an impairment that reverses a previous revaluation should be recognised
through other comprehensive income to the extent of the amount in the revaluation surplus for the
same asset. Any remaining amount should be recognised in the statement of comprehensive income.
Thus:
Carrying value at 31 December 2011 is 45/50 X GH¢10m =
GH¢9m
The revaluation reserve (GH¢16 - GH¢9) =
GH¢7m
The carrying amount at the 31 December 2016 is 40/45 x GH¢16 =
GH¢14.2m
The recoverable amount at 31 December 2016 =
GH¢5.8m
The total impairment charge is (GH¢14.2 -GH¢5.8) =
GH¢8.4m
Of this, GH¢7m is a reversal of the revaluation reserve, so only GH¢1.4m is recognised through the
statement of comprehensive income.
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ANTHONY EDUAH
QUESTION 13
Bosco Aluworks Ltd, a manufacturer and supplier of aluminium utensils for households, has recently
established a new facility in Kumasi. To help in this new operation, Bosco Aluworks Ltd have secured a
number of grants from the Government of Ghana and are unsure how the grants are to be accounted
for in the financial statements. The company has a year end of 30 April 2017 and all the following
transactions took place at 1 May 2016.
i)
Bosco Aluworks Ltd has been awarded a grant for GH¢80,000, to be received over three years, in
respect of providing employment to fresh graduates in the area.
Bosco Aluworks Ltd received a GH¢5,000 grant from the Ministry of Business Development for
the initial training of the new employees.
The company also received a grant of GH¢120,000 from the Ministry of Special Development
Initiative towards the acquisition of a GH¢600,000 machine. The machine has a useful economic
life of 8 years and an estimated residual value of GH¢60,000. Depreciation is on the straight line
basis.
ii)
iii)
Required:
Explain how each of the above should be accounted for in the financial statements of Bosco Aluworks
Ltd for the year ended 31 April 2017, in accordance with IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
SUGGESTED ANSWER
i.
Credit to the Income Statement in the year in which the expenditure relates. As this relates
to the cost of employment it will be allotted to each year as an offset to the salaries or
presented as a separate line item in statement of profit or loss. GH¢80,000/3 years =
GH¢26,667 in year 1 and 2 and the balance in year 3
ii.
Revenue based grant which will be credited in the year the related expenditure is incurred,
i.e. the current year
iii.
The grant will be credited to the deferred income account and released over the 8 year
economic life of the asset. On the balance sheet the unamortized balance of the grant will
be treated as deferred income. GH¢120,000/8 years.
Opening balance
Income statement
Closing balance
GH¢
120,000
15,000
105,000
The asset will be depreciated over 8 years straight line. (GH¢600,000 – GH¢60,000) / 8
years. Income Statement charge GH¢67,500.* * Alternative method acceptable.
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QUESTION 14
IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition,
construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time
to get ready for its intended use or sale) are to be capitalised or included in the cost of the asset once
they meet certain conditions.
Required:
Identify THREE conditions that must be met before an entity can commence to capitalise borrowing
cost.
SUGGESTED ANSWER
Capitalization should commence when:
• expenditures are being incurred,
• borrowing costs are being incurred and
• activities that are necessary to prepare the asset for its intended use or sale are in progress (may
include some activities prior to commencement of physical production). [IAS 23.17-18]
QUESTION 15
RoyCo acquired a brand new property (land and buildings) on 1 January 2016 for GH¢40 million
(including GH¢15 million in respect of the land). The asset was revalued on 31 December 2017 to GH¢43
million (including GH¢16.6 million in respect of the land). The buildings element was depreciated over a
50-year useful life to a zero residual value. The useful life and residual value did not subsequently need
revision. On 31 December 2018 the property was revalued downwards to GH¢35 million as a result of
the recession (including GH¢14 million in respect of the land).
The company makes a transfer from revaluation surplus to retained earnings in respect of realised
profit.
Required:
Calculate the amounts recognised in profit or loss and in other comprehensive income for the years
ended 31 December 2017 and 31 December 2018.
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SUGGESTED ANSWER
Revaluation of Property plant and equipment
Land
Buildings
GH¢'000
Total
GH¢'000
GH¢'000
15,000
25,000
40,000
0
( 1,000)
(1,000)
Carrying amount 31-12-17
15,000
24,000
39,000
Revaluation gain (balance)
1,600
2,400
4,000
Revaluation amount 31-12-17
16,600
26,400
43,000
Depreciation charge (26,400 /48)
______
(550)
(550)
Carrying Amount 31-1-2018
16,600
25,850
42,450
Revaluation loss (balance)
(2,600)
(4,850)
(7,450)
Revaluation amount 31-12-18
14,000
21,000
35,000
Cost 1 January 2016
Accumulated Depreciation (Jan 2016-Dec 2017)
Transfer (excess depreciation) 24,000/48yrs =50
Note: The excess depreciation is the difference between the initial depreciation ratio thus
25,000,000/50yrs = 500,000 and it immediate subsequent ratio; 24,000,000/48 = 550,000
RoyCo Statement of Profit or Loss and other Comprehensive income Extract for the
2018
GH¢'000
2017
GH¢'000
Expenses
Depreciation Charge
Revaluation loss (7,450-3,950)
550
500
3,500
0
Other Comprehensive Income
Revaluation Surplus
0
Transfer (2400/48)
(50)
(3,950)
ANTHONY EDUAH
4,000
3,950
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QUESTION 16
Define ‘equity’, and explain why the conceptual framework does not prescribe any recognition criteria
for equity.
SUGGESTED ANSWER
The conceptual framework defines equity as ‘the residual interest in the assets of the entity after
deducting all its liabilities’. Equity cannot be identified independently of the other elements in the
statement of financial position/balance sheet. The characteristics of equity are that equity is a residual,
i.e. something left over after the entity has determined its assets and liabilities. In other words: Equity =
Assets –Liabilities.
There is no need for recognition criteria for equity as it is a residual, determined after recognition
criteria are applied to the other elements. In other words, the recognition of assets and liabilities will
lead to recognition of equity
QUESTION 17
Ejura Ltd (Ejura) is a Manufacturing and retail company which prepares financial statements in
accordance with International Financial Reporting Standards (IFRS) up to 31 December each year. In
order to generate or improve sales on one of its older products, Ejura offered a promotion named
‘something for free’. The promotion included free maintenance services for the first two years. On 1
October 2019, under the promotional offer, Ejura sold goods to a supermarket chain for GH¢4.4 million.
A two-year maintenance contract would normally be sold for GH¢0.5 million, and the list price of the
product would normally be GH¢5 million. The transaction has been included in revenue at GH¢4.4
million.
Required:
In accordance with IFRS 15: Revenue from Contracts with Customers, justify the appropriate accounting
treatment for the above transaction in the financial statements of Ejura for the year ended 31 December
2019.
SUGGESTED ANSWER
Under (IFRS 15), each component should be measured separately. As only three months of the
maintenance service has been provided, we should only recognize 3/24 of the maintenance fee as
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revenue in the year ended 31 December 2019. The remainder should be treated as deferred income and
recognized as the service is being provided.
The sale of goods, however, should be recognized immediately. As the total of the fair values exceeds
the overall price of the contract, a discount has been provided.
As we do not know what has been discounted, it would seem reasonable to apply the same discount
percentage to each separate component. The discount is 20% based on listed prices (i.e. [4.4m/(5m +
0.5)] – 1).
GH¢m
Sale of goods (GH¢5m x 80%)
4
Sale of services (3/24 x GH¢0.5m x 80%)
0.05
Revenue to be recognized in year ended 31 December 2019
4.05
Deferred income should be measured at GH¢0.35m (21/24 x GH¢0.5m x 80%).
Revenue (retained earnings should therefore be reduced by GH¢0.35m.
GH¢m
Dr Retained earnings
GH¢m
0.35
Cr Deferred Income (CL)
0.35
Step 1: Identify contract with the customer
Step 2: Identify the performance obligations within the contract
• Sale of product
• Maintenance contract
Step 3: Determine the transaction price – the transaction price is GH¢4.4 million
Step 4: Allocate the transaction price among the performance obligations within the contract
• Based on the standalone selling price of the individual obligations
• Where the standalone selling price are not available, use expected cost plus %
• Where the above is not available, use the residual approach.
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In this case, the scenario provides the standalone selling prices and hence, these shall be used to
allocate the price. Allocation of transaction price to
Sale of products (GH¢5 million / GH¢5 million + GH¢0.5 million x GH¢4.4 million = GH¢4
Maintenance: GH¢0.5 million/ GH¢5 million + GH¢0.5 million x GH¢4.4 million = GH¢0.4
Step 5: Recognise the revenue over time or at point in time • Revenue from the product would be
recognize during the contract period as control over the product is transferred to the customer. •
Revenue from the maintenance contract would be earned over a period of 24 months. Therefore, for
the current period, 3/24 months would be recognised as revenue, and the remainder would be
deferred.
QUESTION 18
In accordance with IFRS 5: Non-Current Assets held for Sale and Discontinued Operations explain with
reasons, whether each of the following could most likely be classified as a discontinued operation in this
year's financial statements:
i)
A reportable operating segment that met the definition of held for sale after the year end,
but before the financial statements were authorised for issue.
ii)
ii) A division of a business, classified as held for sale, that was correctly treated as a
discontinued operation in last year's financial statements, but which has not been sold By
his year-end due to the sale being referred to the Securities and Exchange Commission
(SEC). SEC is not expected to report its findings until 6 months after this year end.
SUGGESTED ANSWER
I.
Classification as held for sale is a non-adjusting event after the reporting period (IAS 10 para
22(c)). Therefore the definition of a discontinued operation is not met as the assets are
neither discontinued in the period nor classified as held for sale at the year end
II.
For an operation not yet sold or abandoned to meet the definition of discontinued
operation, it must meet the IFRS 5 held for sale criteria. All of these criteria were met at the
previous year end, however at the current year end the operation was not sold within 12
months of classification and the period is expected to be extended well past this. However,
where the period is extended by an event beyond the entity's control such as this IFRS 5
Appendix B permits classification as held for sale (and therefore treatment as a discontinue
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operation) to continue provided the other criteria are still met, which appears to be the case
here.
QUESTION 19
Dambai Ltd (Dambai) is a large manufacturing company. Wherever possible, it structures its operations
to take advantage of any financial assistance available from national and regional authorities.
During the year, Dambai decided to relocate some of its other operations to a regional development
area, which offers attractive labour costs and tax incentives. The regional government agreed to
contribute GH¢200,000 as a result of Dambai setting up in the regional development area. There are no
particular conditions as to what the money should be spent on. The cash was received on 1 August
2019.
Required:
In accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
explain the financial reporting treatment of the above in the financial statements of Dambai for the year
ended 31 December 2019.
SUGGESTED ANSWER
The contribution of GH¢200,000 by the regional government is not dependent on any particular
activities of the entity. • The GH¢200,000 should be credited directly to profit or loss as it does not
compensate specific expenses.
QUESTION 20
On 1 January, 2021, QRS Ltd commenced the construction of a new factory. The following payments
were made during 2021.
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GHC
31 January
200,000
31 March
450,000
30 June
100,000
31 October
200,000
30 November
250,000
The first payment on 31 January was funded from the enterprise's pool of debt. However, the
enterprise succeeded in raising a medium-term loan for an amount of GH¢800,000 at 31 March 2021
with simple interest of 9% per annum, calculated and payable monthly in arrears. These funds were
specifically used for this construction. Excess funds were temporarily invested at 6% per annum monthly
in arrears and payable in cash. The pool of debt was again used to an amount of ¢200,000 for the
payment on 30 November which could not be funded from the medium-term loan.
The construction project was temporarily halted for three weeks in May due to substantial technical and
administrative work being carried out. It is assumed that management of Blessed Company adopted the
accounting policy of capitalizing borrowing costs. The following amounts of debt were outstanding at
the statement of financial position date, 31 December 2021
GH ¢
·Medium-term loan (see above)
800,000 ·
Bank overdraft
750,000
(The weight average amount outstanding during the year was GH¢750,000 and total interest charged by
the bank amounted to GH ¢33,800 for the year)
A 10%, 7-year note dated 1 October 2020 With simple interest
payable annually at 31 December
9,000,000
Required
Calculate the amount of borrowing cost to capitalize.
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SUGGESTED ANSWER
Interest to be capitalize
GH ¢
Interest on general Borrowing W1
19,160
Net interest on specific Borrowing W2
43,500
62,660
Working 1
Capitalization rate for General Borrowing
Amount (GH ¢)
Interest(GH ¢)
Bank overdraft
750,000
33,800
10% 7-yr Note
9,000,000
900,000
9,750,000
Rate to be Applied
933,000
933,000/9,750,000 = 9.58%
Interest on Payment made from general Borrowing
01-31-2021
200,000 x 0.0958 x 11/12
=
11-30-2021
200,000 x 0.0958 x 1/12
= 1597
Net interest on General Borrowing
17563
19160
Working 2
Interest on Specific Borrowing
31-03-2021
800,000 x 0.09 x 9/12
=
54,000
Interest Income
31-March – 30 June (800,000 - 450,000) x 0.06 x 3/12
= 5,250
30-June -- 31- Oct
(800,000 - 450,000 – 100,000) x 0.06 4/12
= 5,000
31-Oct -- 30-Nov
(800,000 – 450,000 – 100,000 -200,000) x 0.06 x 1/12
= 250
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10,500
Net Interest
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(54,000-10,500)
=
43,500
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