GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

EXAMINATION
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MASTER OF COMMERCE DEGREE PART 1 SEMESTER 1

APPLIED FINANCIAL REPORTING AND REGULATIONS

MAAC 503

DATE November/Dec 2015

DURATION 4 HOURS

INSTRUCTIONS TO CANDIDATES

1. ANSWER ALLQUESTIONS

2. START EACH ANSWER ON A FRESH PAGE

3. SHOW ALL WORKINGS, WHERE APPLICABLE

1
QUESTION 1

(a)
An indicator exists that the assets of a division of Maguta an SME in Mwenezi are
impaired. The indicator is the decision to sell the division at the end of the next
period (31 December 2015). The cash flows of the division for 2015 are as follows:

Revenue 560 000

Cost to produce the revenue 420 000

Estimated selling price less cost to sell at 31 December 2015 250 000

The estimated selling price less cost to sell is estimated to be $310 000 at 31
December 2014.

An appropriate discount rate of this division is 12% and cash flows from revenue and
costs are earned and incurred evenly throughout the year.

Required:

Determine the value- in- use and the recoverable amount at 31 December 2014.

(9 marks)

(b)

The Financial statements of Jambanja for the year ending 2014 shows property,
plant and equipment at net book value of $30 000. The cost of the PPE is shown as
$120 000 and with accumulated depreciation amounting to $90 00. Jambanja has
Government grants of $5 000 which are repayable within the next 12 months and
$15 000 grant repayable beyond one year.

During 2015 the following transpired;

 An item of plant was disposed of on 1 January 2015 for $6,000 which had
cost $45,000 on 1 January 2012. The plant was being depreciated on a
straight-line basis over four years assuming a residual value of $5,000. A
government grant was received on its purchase and was being recognised in
the income statement in equal amounts over four years. In accordance with
the terms of the grant, Jambanja repaid $1,500 of the grant on the disposal
of the related plant.
 An item of plant was acquired on 1 April 2015 at a cost of $96 000.
Modifications were made to the plant amounting to $6 000 and Jambanja
incurred $3 000 for the plant’s transportation and installation. The plant
qualified for a government grant of 25% of the base cost of the plant, but it
had not been received by 31 December 2015. The plant is to be depreciated
on a straight-line basis over three years with a nil estimated residual value.
 All other plant is depreciated by 15% per annum on cost

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  $5,500 of the $15,000 non-current liability for government grants at 1
January 2015 should be reclassified as a current liability as at 31 December
2015.
 Depreciation is calculated on a time apportioned basis.

Required:

Prepare extracts of Jambanja's income statement and statement of financial position

in respect of the property, plant and equipment and government grants for the year
ended 31 December 2015.

(9 marks)

(c)

Ms Togara is the owner of a retail business in Mashava. She has employed an

inexperienced bookkeeper to maintain her accounting records.

(a) On 31 March 2013, the end of the business’s accounting year, the
bookkeeper extracted the following trial balance from the business’s records:
Trial Balance at 31 March 2013
Narration $ $

Dr Cr
Non current assets at cost 18 300
Provision for depreciation on non-current assets 1 April 2 800
2012
Inventory 1 April 2012 3 700
Inventory 31 March 2013 2 960
Trade accounts receivable 1 825
Trade accounts payable 864
Balance at bank (overdrawn) 382
Capital 26 860
Drawings 7 740
Sales 26 080
Purchases 18 327
Running expenses 6 904
Allowance for doubtful debts 90
Suspense 16 888
66 860 66 860

Required:

(i) A corrected version of Ms Togara’s trial balance dated 31 March 2013

based on the above information, but with an amended figure for the
suspense account. (2 marks)
(b) The following errors were found in the accounting system after a corrected
version of the trial balance above was prepared;

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  The total of the sales day book for December2012 had been overstated
by $120
 In January 2010 some new office equipment had been purchased for
$360; this had been debited to the purchases account
 A payment by cheque to a creditor, $216, had been entered in the
books as $261
 A credit note for $37 sent to a customer had been overlooked
 The owner had withdrawn a cheque for $80 for private use in October
2009; both the bank and drawings account had been credited with this
amount.

Required:

(ii) Journal entries to correct each of these errors (2 marks)

(iii) The suspense account (Start with the amount in the corrected trial balance
given in answer to required (i) above, and include any entries arising from
the correction of the errors) (3 marks)

[Total 25 marks]

QUESTION 2

(a)On 1 January 2014 Tinny Tots decided to build a nursery school for its
employee’s children. Government approved a cash grant of $500 000 provided the
building is completed by 31 March 2015, and is used as a nursery school for at least
10 years. A pro-rata portion is refundable if the building is not used as a nursery
school for 10 years. Tiny tots received the cash grant on 1 November 2014. It
completed the school on 31 January 2015 at a total cost of $1 000 000 and
immediately started to use the building as a nursery school. $800 000 of the amount
was incurred at 31 December 2014.

Required;

Provide the journal entries to account for the cost of the nursery school and the
government grant for the financial periods ending 31 December 2014 and 31
December 2015. Assume buildings are depreciated over 20 years.

(10 marks)

(b)
Critically analyse;
(i) The impact of SMEs to the Zimbabwean economy and its link to social and
financial accounting and accountability by the Government. (10 marks)
(ii) The Adoption of IFRS for SMEs in Zimbabwe. (5 marks)

[Total 25 marks]

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QUESTION 3

GeeBie prepares its financial statements for the year ended 31 December 2015 in
accordance with the IFRS for SMEs. Financial information for 2015 (in thousands of
currency units):
2015 2014
Accounts receivable 725 850
Trade payables 310 425
Inventory 625 550
Increase in other expenses payable—services 15
Increase in wages and salaries payable 65
Increase in accrued interest 2
Increase in current tax payable 10
Decrease in deferred tax—asset 7
Purchases of inventory 5,425
Sales revenue from the sale of goods and
rendering services 16,540
Other expenses—services 210
Wages and salaries expense 4,690
Interest expense 95
Income tax expense 205

GeeBie classifies interest paid in operating activities and interest received in

investing activities.

In 2015GeeBie:
 borrowed (and received) $590 (long-term loan)
 paid $90 to settle long-term borrowing
 received interest of $5
 paid $265 for property, plant and equipment acquired
 received $150 from the sale of equipment
 paid $135 to acquire a software licence custom-made for its production
process
 paid $345 to acquire an investment property
 purchased a second investment property on credit for $345
 paid $110 as a reduction of financial lease liability.

GeeBie had $130 in cash and cash equivalents at beginning of the 2015 reporting
period and $5,940 in cash and cash equivalents at the end of the 2015 reporting
period.

Required:

Prepare GeeBie’s statement of cash flow for the year ended

31 December 2015 using the direct method of presenting operating cash flows.

[Total 25 marks]

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QUESTION 4

Iron Fist an SME at Gazaland home industry, Highfields, in Harare entered into a
contract with a customer to supply and install a machine on 1 January 20X2 and to
service the machine on 1 July 20X2 and 1 January 20X3. The cost of the machine to
Iron Fist is $80,000. It is possible for a customer to purchase both the machine and
the maintenance services separately.

The customer is contractually obliged to pay Iron Fist $200,000 on 1 January 20X3.

The prevailing rate for one-year credit granted to trade customers in the industry is 5
per cent per six-month period.

Experience has shown that the servicing of a machine of the model sold to the
customer is expected to cost Iron Fist $15,000 to perform the first service and
$25,000 to perform the second service. Assume actual costs equal expected costs.
When Iron Fist provides machine services to customers in a separate transaction it
earns a margin of 50 per cent on cost.

On 1 January 20X2 the cash selling price of a machine of the model sold to the
customer is $125,964.

Required:

(a) Identify the components of the transaction that entity Iron Fist must apply the
revenue recognition criteria to separately. (3 marks)
(b) Calculate the amount of revenue Iron Fist must allocate to each component of
the transaction. (7 marks)
(c) Prepare accounting entries to record the information set out above in the
accounting records of Iron Fist for the years ended 31 December 20X2 and
20X3. (10 marks)
(d) Draft an extract showing how revenue could be presented and disclosed in
the financial statements of Iron Fist for the year ended 31 December 20X3.
(5 marks)
[Total 25 marks]

END OF EXAMINATION