INTEGRATED PAPER 2
READING PAPER
CTA PROGRAMME – PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE
TEST 2 EXAMINATION
[100 Marks]
Date: Monday 6 September 2021
Time: Afternoon Paper
Time Allowances:
MARKS
MINUTES
Reading time
BOOKLET
30
Writing time
100
150
Total
100
180
PINK
INSTRUCTIONS
1) Enter your student number on the front of the answer book.
2) Your name must not appear anywhere.
3) Use of non-programmable calculators is permissible.
4) Any calculations must be shown in your answer book.
5) Working papers must be handed in with the scripts.
6) Answers Must Be Written in Ink Not Pencil
7) No corrections will be made DURING THE EXAM on perceived errors/queries on exam
content, the paper is to be written as is.
Disclaimer clause: All names of persons, places and business entities mentioned in this examination paper
are fictitious and any resemblance to real persons, living or dead, places and business entities are purely
coincidental.
This is a limited open book examination (use of SAICA and ICAZ handbooks is permissible)
CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
Assume that all amounts in the scenario are exclusive VAT unless otherwise stated.
Mbingaldo (Pvt) Ltd (“Mbingaldo”) is a company incorporated in Zimbabwe and holds
investments in companies that are in different sectors of the economy including finance,
energy, retail and information communication technologies, to name a few. Mbingaldo is an
ICAZ accredited training office, and all companies within the Mbingaldo group have a 31
December year end. You are a 2nd year trainee within the Mbingaldo finance department. The
group is in the process of finalising the financial statements for the 2020 financial year, and
you were assigned some tasks by the finance director and the finance managers, who are all
Chartered Accountants.
During the process of performing the tasks assigned to you, you collated the following issues:
Issue 1 – Mbada Inc LLC
Mbada Inc LLC (“MI”) is a USA incorporated entity in which Mbingaldo had previously
acquired a 35% shareholding, and effectively had significant influence from date of
incorporation. The shareholding had been acquired for US$100,000 on 1 January 2016. On
the 1st of July 2020, Mbingaldo finalised a deal with one of the shareholders of MI which
resulted in Mbingaldo acquiring an additional 40% shareholding and thus obtaining control
over MI. The following are details you managed to extract from meeting minutes and reports
on the deal:
Deal meeting minutes
On acquisition date the following were transferred:
-
Mbingaldo paid US$500,000 cash to the former shareholder of MI;
As part of the deal, Mbingaldo issued an additional 2,000 shares at the market price of
ZWL10 each, which were awarded to the former shareholder of MI. This did not result
in the former shareholder of MI obtaining any kind of influence in Mbingaldo;
Mbingaldo gave the former MI shareholder a piece of land in Chegutu which had a
carrying amount of ZWL3.1 million on the date of transfer; and
A due diligence and valuation of assets had been carried out and completed on 30 June
2020; reports on these were presented in the meeting as below:
-
Due diligence and valuation reports
•
Chegutu land valuation - the piece of land in Chegutu was found to be worth ZWL3.5
million.
• MI due diligence and valuation
The MI due diligence and valuations resulted in the following information coming to
light:
- MI has been in the process of developing a software that they would sell to their
customers soon. At the time of the deal, the software was not yet ready for use,
however, it was valued at US$25,000. All costs in relation to the software had previously
been expensed, and at year end the software was still being developed.
© Chartered Accountants Academy 2021
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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
-
-
MI is currently facing a lawsuit from one of their walk-in clients who got burnt with
coffee at the MI head office reception. The client’s claim is that MI employees burnt him
on purpose. MI lawyers are confident that the case will be thrown out, but estimate the
potential pay out to be US$150,000 if MI loses the case. The first court date is set for 31
May 2021. The gair value of this liability on acquisition date was US$85,000.
Land classified as investment property measured under the fair value model owned by
MI was undervalued by US$100,000.
Other than the differences mentioned above, all other MI assets and liabilities were at
fair value on the date of acquisition.
The investment in MI had a carrying amount of US$250,000 in the financial statements of
Mbingaldo and had a fair value of US$300,000 on the date that Mbingaldo obtained control
of MI. Mbingaldo’s share of FCTR related to initial investment in MI on 1 January 2020 and 30
June 2020 was ZWL 550,000 and ZWL 780,000 respectively.
Between July and December 2020, the following transactions were entered into between
Mbingaldo and MI:
-
-
Mbingaldo acquired machinery for use in day-to-day activities from MI, MI manufactures
this machinery. The selling price on the machinery was US$75,000 and MI sells
machinery at a mark-up of 20%. This machinery was acquired on 1 July 2020 and was
immediately put to use in Mbingaldo operations. It has a useful life of 5 years.
MI paid a US$150,000 dividend on 20 December 2020.
No other intra group transaction had been entered into between MI and Mbingaldo
since incorporation.
Issue 2
At the beginning of the year Mbingaldo held an 80% investment in Shark (Pvt) Ltd (“Shark”)
this had been acquired on 30 October 2015 when retained earnings were ZWL 210,000.
Retained earnings and share capital of the entity were equal to the fair value of the net assets
of Shark at acquisition date. On 1 July 2020, the directors of Shark authorised the issue of
10,000 shares, to which the shareholders had first refusal. Mbingaldo did not participate in
the rights issue and the entire 10,000 shares were acquired by non-controlling shareholders
for ZWL5 per share on the date of authorisation.
© Chartered Accountants Academy 2021
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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
Below is an extract of the trial balances of Mbingaldo, MI and Shark:
Mbingaldo
Share
capital1
31
December
2019
ZWL
100,000
MI
Shark
31
31
31
31
December December December December
2020
2019
2020
2019
ZWL
US$
US$
ZWL
120,000
15,000
15,000
120,000
31
December
2020
ZWL
150,000
Opening
retained
earnings
2,500,000
3,000,000
150,000
350,000
950,000
1,250,000
Net profit
after tax for
the year2
1,050,000
9,300,000
250,000
312,000
300,000
790,000
Investment
in
Shark
(cost)
1,000,000
1,000,000
-
-
-
-
Issue 3
As you are a Chartered Accountant in training, you are required to keep abreast to changes
in your surrounding environment. You noted that ever since the promulgation of Statutory
Instrument 85 of 2020, there has been an increase in income and expenditure in currencies
other than the ZWL across the group and other companies in Zimbabwe in general. You raised
the possibility of a change in functional currency within the group and the need to make a
functional currency assessment in accordance with IAS 21 to the finance director through
email. The finance director’s response is quoted below:
“Our functional currency is still the ZWL. We do not need to worry about
assessing for a change, the Public Accountants and Auditors Board will tell
us when to change the functional and presentation currency.”
1
2
Each entity had 100,000 shares in issue at the beginning of the year.
All income and expenditure items are accrued evenly throughout the year.
© Chartered Accountants Academy 2021
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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
Issue 4
On 1 January 2020 Shumba (Pvt) Ltd (“Shumba”) another subsidiary of Mbingaldo, issued
100,000 ZWL $100 convertible debentures with a 5% coupon rate payable annually. The
debentures are convertible at the option of the holder of the instrument upon maturity at the
end of 5 years. On maturity, the debentures are redeemable at par. Mbingaldo invested in all
the debentures on the date of issue. Similar instruments on the market without a conversion
option attract a market-related interest rate of 9.03% before tax and those with a conversion
option attract a market-related interest rate of 8%.
Issue 5
As a way of retaining top talent within the group, Mbingaldo decided to start incentive
schemes for key employees within the group. Below are some of the incentive schemes
entered into.
On 1 July 2020, 5 executive managers from Shumba were granted 5,000 share options each.
The options had the following conditions attached to them:
-
The options vest in 3 years’ time and one would still have to be within the employ of
Shumba in order to be able to redeem the shares;
The options are redeemable if the share price of Shumba shares exceeds ZWL 250 at
vesting date;
The exercise price is ZWL 150 and the share price on grant date was ZWL 180; and
The fair value for an option without a market related vesting condition was ZWL 105 and
for one with a market related condition was ZWL 130 at grant date.
The group HR director expects all managers to stay employed by Shumba until vesting date.
At a board meeting held on 10 January 2021, the directors of Shumba decided that employees
should receive a 15% share of the company's profits. The amount to be paid out to employees
was estimated at ZWL 2.5 million on that date, however, the pay-out done in March 2021
ended up amounting to ZWL 2.75 million due to adjustments during the ongoing audit.
Issue 6
The group finance manager has drafted the statement of cash flows for the group and has
asked you to review it as he has not worked on a statement of cash flows since he qualified
as a Chartered Accountant. Below is the work done by the finance manager:
© Chartered Accountants Academy 2021
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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
Mbingaldo Ltd
Statement of Cash Flows
US$
Investing Activities
Investment in Mbada
- Cash
- Share issue
- Land
Acquisition of PPE
(500,000)
(10,000,000)
(400,000)
(75,000)
Shark share issue
Shark debentures
Cash flows from investing Activities
Operating Activities
Profit before tax (9.3mil + 312,000 + 790,000)
Adjustment for non-cash items
Depreciation
Cash flows from operations
(50,000,000)
(10,000,000)
(70,975,000)
10,402,000
(7,500)
10,394,500
Dividend paid
Profit share
Share options grant
Interest received from debenture
Tax paid
Cash flows from operating activities
(150,000)
(2,750,000)
(2,625,000)
897,199
(1,250,058)
4,516,641
Cash flows from financing activities
Share issue
Cash flows from financing activities
50,000,000
50,000,000
Total cash outflow
(16,458,359)
© Chartered Accountants Academy 2021
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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY INTAKE – INTEGRATED PAPER 2 – 2021
TEST 2: SCENARIO
Additional information
-
-
The Mbingaldo Group’s presentation currency is the ZWL.
Assume that the tax laws of Zimbabwe and the USA are the same.
Unless otherwise stated, assume a before tax interest rate of 10%
Income Taxes and Capital Gains Taxes are administered in accordance with the Income
Tax Act [Chapter 23:06] and the Capital Gains Tax Act [Chapter 23:01] as read with the
Finance Act [Chapter 23:04].
All PPE items within the group are carried at cost less accumulated depreciation and
impairment. Depreciation is done on a straight line basis.
The group’s policy is to carry investments in subsidiaries at cost in the separate financial
statements of the investor.
Investments in associates and joint ventures are accounted for using the IAS 28 equity
method in both the separate and consolidated financial statements of the investor.
The group measures NCI at its proportionate share of net asset value.
Exchange rates between the ZWL the US$ were as follows:
Period/date
US$1:ZWL
1 January 2019
1:1
22 February 2019
1:2.5
30 June 2019
1:6.54
31 December 2019
1:16.77
1 July 2020
1:63.47
20 December 2020
1:81.88
31 December 2020
1:81.92
Average 1 January – 21 February 2019
1:1
Average 1 January – 30 June 2019
1:3.10
Average 1 July – 31 December 2019
1:13.28
Average 1 January – 31 December 2020
1:51.33
Average 1 January – 30 June 2020
1:23.12
Average 1 July – 31 December 2020
1:79.54
Average 1 January 2016 – 31 December 2019
1: 37.85
© Chartered Accountants Academy 2021
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