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cpa 3 financial reporting 1 revision 4

By Omosa


QUESTIONS NUMBER ONE Centum Ltd(CL). is a company quoted on the Nairobi Stock Exchange. It makes up its accounts to 31 March each year. The balance of the company as at 31 March 2003 is as follows: Sh. Million Sh. Million Administrative expenses Borrowings Buildings: Valuation at 1 April 1998 Accumulated depreciation Capital work in progress Cash and bank balances Cost of sales Compensating tax payable Deferred income taxes Deferred expenditure Distribution costs Finance leases payable Finance costs Finance income Inventories Other operating expenses Other operating income Plant and machinery: Cost Accumulated depreciation Prepaid operating lease rental: Cost Amortisation of prepaid operating lease rental Revaluation reserve Share capital Share premium Taxation Turnover (net of VAT) Trade and other payables Trade and other receivables Revenue reserve Unclaimed dividends 99 180 74 5 601 15 109 27 186 3 907 80 17 194 _____ 103 30 8 151 7 2 4 283 20 110 450 188 884 160 95 2 2,497 2,497 Additional information 1. 2. Borrowings comprise: Bank overdraft (interest are payable in the year 20%) Bank loan, repayable 31 March 2005 (interest rate 13% fixed) Buildings: Historical cost Depreciation charge for the year included in cost of sales Sh.million 53 50 103 60 6 CL’s accounting policy in relation to the difference between depreciation based on the revalued amount of buildings (Sh.6 million) and depreciation based on the buildings’ historical cost (Sh.2 million) is to treat it as revaluation surplus realized as the buildings are used. This transfer for the year has not yet been made. The buildings had been revalued by NENE and SIKWA, Registered Valuers and Estate Agents, on an open market basis. Accumulated depreciation on historical cost of buildings as at 31 March 2003 was Sh.20 million No impairment losses have occurred in the life of the company 3. Capital work in progress relates to ongoing construction of a new kin. 4. The compensating tax payable was in respect of the previous year’s dividend paid in the year. The directors have proposed that a dividend of 10% be paid for the year ended 31 March 2003. No entry has been made in the financial statements to reflect this. Proposed dividends are accounted for as a separate component of equity until they have been ratified at a general meeting. 5. Deferred expenditure represents development costs relating to production of new products that are written off over four years. Expenditure of Sh.20 million was incurred early in the year to 31 March 2003. The amortisation charge for the year was Sh.5 million. 6. The tax expense for the year is as follows: Current taxation based on adjusted profit at 30% Deferred tax expense Ignore deferred tax on the revaluation surplus Sh. Million - 17 17 7. Finance lease payable comprise: Payable within one year Payable later than one year but not later than five years Minimum lease payments Sh. Million 3 8 11 Present value of minimum lease payments Sh. Million 5 5 7 8. Finance costs comprise: Interest on bank loan Interest on bank overdraft Interest on finance leases Sh. Million 9 16 2 27 9. Finance income: Interest received on bank deposits Sh. Million 2 10. Inventories comprise: Raw materials Work in progress Finished goods Stores and spares Sh. Million 48 29 51 58 186 11. The depreciation charge for the year on the plant and machinery was Sh.52 million and the amortisation charge of the prepaid operating lease rental was Sh.2 million All depreciation and amortisation charges are included in cost of sales 12. Other expenses included in the various functional expenses or cost of sales are: Sh. Million Sh. Million Directors’ emoluments: Fees Other emoluments Other staff costs: Wages and salaries Social security cost (NSSF) Termination benefits Auditors’ remuneration Loss on disposal of motor vehicles 2 12 81 2 3 14 86 2 3 105 The average number of staff employed by the company during the year was 603. 13. The authorized share capital of the company is made up of 90 million ordinary shares of Sh.5 each. Required: Prepare the Income Statement and the Statement of Changes in Equity for the year ended 31 March 2003 and the Balance Sheet as at 31 March 2003. CL Limited prepares its Balance Sheet showing Total Assets and Total Equity and Liabilities. Any notes necessary to ensure that the Financial Statements are prepared in accordance with Internation Financial Reporting Standards should be added, but using only the information included above. Do not compute the Earnings Per Share for the year. NUMBER TWO Kilo, Lilian and Mephas had started a partnership on 1 April 1992 when they contributed capital of Sh.9 million, Sh.3 million from Kilo, Sh.2 million from Lilian and Sh.4 million from Mephas. No salaries were to be paid to any of the partners, but interest would be credited at 20% per annum – computed on these amounts – and any remaining profit was to be shared equally amongst the partners. As at 31 March 2002, the balance sheet of the partnership was as follows (shown horizontally for conciseness): Assets: Capital and Kilo Lilian Mephas Total Liabilities Property, plant and equipment Capital Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Cost Sh.’000’ Depreciation Sh.’000’ NBV Sh.’000’ Fixed Capital Accounts 3,000 2,000 4,000 9,000 Freehold land Buildings Plant and machinery Motor vehicles Current assets: Inventory Trade receivables Cash at bank 2,000 3,000 12,000 4,000 21,000 Nil 900 3,000 3,000 6,900 4,400 3,400 1,150 2,000 2,100 9,000 1,000 14,100 8,950 23,050 Current Accounts Current Liabilities Trade payables 3,190 2,000 1,500 6,600 7,360 ____ 23,050 The business was run by the partners to 31 March 2003. They decided to convert the partnership into a limited company with effect from 1 April 2003. This was to be achieved as follows: 1. Property, plant and equipment had been depreciated on opening cost (no assets had been bought or sold in the year to 31 March 2003) by 3% on buildings, 12½% on plant and machinery and 12½% on motor vehicles. The company would take over the land, buildings, plant and machinery at Sh.5 million, Sh.4 million and Sh.10 million respectively. The partnership owned three motor cars which had all be bought at the same time: the one Kilo uses cost Sh.1.6 million; the one Lilian uses cost Sh.1.4 million; the one Mephas uses cost Sh.1 million; all the cars have a useful life of eight years and a residual value of nil. Each partner was to take over the motor car he uses – Kilo’s for Sh.400,000, Lilians’s for Sh.260,000 and Mephas’s at Sh.205,000. 2 Inventory valued at cost for Sh.5.2 million was to be transferred to the company for Sh.5.7 million. One trade receivable for Sh.1.2 million was to be collected personally by Kilo; the partners estimated that only Sh.840,000 would be collected from this debtor. Sh.2.9 million, the balance of trade receivables, would be transferred to the company at book value. Trade payables in the partnership at 31 March 2003 stood at Sh.5.1 million. If payment could be made by 30 April 2003, this liability could be settled for Sh.4.5 million. It was agreed by the three partners that they would introduce Sh.3.22 million immediately to raise the cash in the business to an amount just sufficient to clear this liability immediately so that trade payables could be transferred at Sh.4.5 million. The actual payment to creditors was made by the company a few days later. Kilo paid Sh.1,225,000 into the partnership bank account; Lilian paid in Sh.355,000 and Mephas paid in Sh.1,640,000. 3. The new company, Pango Limited, had an authorized share capital of 2 million shares of Sh.10 each. These shares would be issued to the partners at a premium of 50% in satisfaction of the purchase consideration. 4. Kilo had made drawings of Sh.1,440,000 in the year, Lilian Sh.960,000; Mephas Sh.1,200,000. Required: (a) Prepare the realization account of the partnership as at 31 March 2003 (8 marks) (b) Prepare the partners’ capital accounts for the year ended 31 March 2003 (current accounts should be closed off to the capital accounts as early as possible) (8 marks) (c) Prepare the opening Balance Sheet of Pango Limited. (4 marks) (Total: 20 marks) NUMBER THREE Karuma Limited is an insurance company with a head office in Nairobi and branches in all the major towns in Kenya. Each branch maintains a separate set of books. However, for control purposes, all the property, plant and equipment I the branches are carried in the head office books, as are depreciation accounts for all these items. The current accounts between the head office and the Mombasa branch do not agree at the company’s year-end, 31 March 2003. the accounts had been agreed at the previous year end 31 March 2002. The difference in the current accounts is due for the following items: 1. Port Beach Hotel has a number of policies with Karuma Limited. Since it is a large client, these policies are dealt with by the head office in Nairobi. The hotel had paid Sh.846,000 by cheque to the Mombasa branch on 1 January 2003 for the year to 31 December 2003. The Mombasa branch credited the Fire Premium Account with this amount. At 31 March 2003, the head office showed Port Beach Hotel as a debtor in this amount, the income aspect of the transaction having been accounted for correctly. 2 Lamu Ferries Limited sold one of its ferries on 30 September 2002. It informed the branch in Mombasa of this fact, and requested a credit note for the return premium in the amount of Sh.228,000. The Mombasa branch had never issued the credit note as required, but a credit note had been issued by the head office on 19 March 2003 for the sum involved, being recorded in the premium

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