C1 Free Problem Solving Session Nov 2019 - Set 3

PROBLEM SOLVING SESSION
CORPORATE REPORTING C1
FOR NOV 2019 EXAMS
[SET 3]
Prepared By: Godson Leonard: MBA (Finance), Bachelor of Accounting (Hons), CPA (T) &
Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348 616 | Phone1:
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com
COVENANT FINANCIAL CONSULTANTS PROBLEM SOLVING SESSION [SET 3]
QUESTION ONE [1]

a) IFRS 15 revenue from contracts with customers deals with accounting requirements for
contracts in respect of which performance obligations are satisfied over time.
Required:
i. Describe the issues of revenue and profit recognition relating to contracts where
performance obligations are satisfied over time.
ii. On 1st October 2017 Kima entered into a contract where performance obligation
were deemed to be satisfied over time. The contract was expected to take 27
months and therefore to be completed on 31st Dec. 2019. Details of the contract
are:-
“000”
Total contract revenue 12500
Estimated total cost of the contract (excluding plant) 5500
Plant for use on the contract was purchased on 1st January 2018 (three months into
the contract as it was required at the start) at a cost of TAS 8m. The plant has a
four year life and after two years when the contract is complete it will be
transferred to another contract at its carrying amount. Annual depreciation is
calculated using the straight line method (assuming nil residual value) and
charged to the contract on a monthly basis at 1/12 of the annual charge.
The correctly reported profit or loss results for the contract for the year ended 31st
march 2018 were:-
“000”
Revenue recognized 3500
Contract expenses recognized (2660)
Profit recognized 840
Details of the progress of the contract at 31st march 2019 are:-

“000”
Contract costs incurred to date (excluding depreciation) 4800
Agreed value of work completed and invoiced to date 8125
Total cash received to date (payments on account) 7725
The percentage of performance obligation satisfied is calculated as the agreed

value of work completed as a percentage of agreed contract price.
+255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 1
Required:
Calculate the amounts which will appear in the statement of profit or loss and the
statement of financial position of Kima, including the disclosure note of contract
assets and liabilities for the year ended/as at 31st March 2019 in respect of the
above contract.
b) On 1st October 2019 Losha sold a machine to a customer for a total price of TAS 500,000.
Losha invoiced a customer for TAS 500,000 on 1st October 2019 and the customer made
payment to Losha on 15th October 2019. The terms of the sale included an arrangement
that Losha would service and maintain the machine for a four year period from 1 st
October 2019. Losha would normally charge an annual fee of TAS 37,500 for a service
and maintenance arrangement of this nature. The normal selling price of the machine
without a service and maintenance arrangement was TAS 450,000.
Required: Explain how the above transaction would be accounted for in the financial
statements of Losha for the year ended 30th September 2020
QUESTION TWO [2]

The directors of TAMRATIO Ltd, a chemical manufacturing entity with several factories
throughout Tanzania, have provided you with the following financial statements for the
company for the year ended 31 March 2018 together with the comparatives for the year ended
31 March 2017.
Statements of profit or loss and other comprehensive income for the year ended 31 March
2018 2017
TAS ’000 TAS ’000
Revenue 1,026,000 867,000
Cost of sales (720,000) (607,500)
Gross profit 306,000 259,500
Distribution costs and administrative expenses (153,600) (99,000)
Finance costs (15,600) (13,500)
Profit before tax 136,800 147,000
Income tax expense (39,000) (42,000)
Profit for the year 97,800 105,000
Other Comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation 93,000 33,000

Actuarial gains on defined benefit pension plans 24,000 30,000
Total comprehensive income for the period 214,800 168,000
Statements of financial position as at 31 March

2018 2017
TAS ’000 TAS ’000
Assets
Non-current assets
Property, plant and equipment 777,900 536,400
Employee benefits 186,000 162,000
963,900 698,400
Current Assets
Inventories 135,000 108,000
Trade receivables 129,000 156,000
Cash and cash equivalents nil 3,600
264,000 267,600
Total assets 1,227,900 966,000
Equity and liabilities
Equity
Share capital (K100 ordinary shares) 300,000 300,000
Revaluation reserve 126,000 33,000
Other reserves 54,000 30,000
Retained earnings 223,800 126,000
703,800 489,000
Non-current liabilities
Bank loan 180,000 180,000
6% loan notes (Redeemable on 1 July 2020) 162,000 156,000
342,000 336,000
Current liabilities
Trade payables 174,000 141,000
Short term borrowings 8,100 nil
182,100 141,000
Total equity and liabilities 1,227,900 966,000
The directors of TAMRATIO Ltd have asked you to help analyze the financial performance and
position of the company as they wish to apply for additional finance from the bank to fund the
company’s ongoing expansion programme. They are not sure whether the company will achieve
the following key ratios used by the bank to assess companies in this type of industry before
providing further finance:
Ratio Target
Debt/equity 50%
Interest cover 9.5 times
Current ratio 1.5:1
Quick ratio 1.1:1
Required:
(a) Calculate the above ratios and any other relevant ratios that you think will assist in
assessing the financial performance and position of TAMRATIO Limited.
(b) Prepare a report that explains the financial performance and position of TAMRATIO Ltd
for presentation to the Board of Directors of TAMRATIO Ltd, including a reference as to
whether the bank is likely to view the financial performance and position of the company
as acceptable.
QUESTION THREE [3] SET 01 AND 02

a. Gonja Ltd is an investment company which holds a portfolio of securities linked to
the real estate market in Tanzania. The following information is available at 31 July
2018 regarding this portfolio:
i) The portfolio cost TAS 13 million 2 years ago.
ii) Real-estate prices in Tanzania are generally accepted to have dropped by 20-
30% in the past 2 years.
iii) The portfolio of securities held by Gonja is difficult to value, as there is no
active market. However, the company has received an offer of TAS 2.6 million
for this portfolio from an investor. It has no intention of accepting this offer
although similar companies have accepted offers from this investor due to
financial difficulties.
iv) A normal sale in the present climate could be reasonably expected to yield TAS
6 million, based on an analysis of transactions in similar assets.
v) Gonja’s valuation models suggest that the real estate market in Tanzania will
recover, and it expects that the portfolio will generate TAS 12 million (at
present value) over the next three years.
Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the
amount it should state its investment portfolio in its financial statements to 31 July
2018, assuming it wishes to use fair value as measured.
b. You are the financial controller of Navrongo Ltd (Navrongo), a company that
experienced a relatively difficult trading during the year ended 30 September 2018.
Reporting deadlines for the 2018 financial statements are rapidly approaching and
you have a number of matters to finalise. The finance director made the following
suggestion in an email:
“A revised accounting standard that is relevant to Navrongo is expected to be issued

by the IASB during the 2019 calendar year. Based on the content of the corresponding
exposure draft, the revisions to the accounting standard would be beneficial to
Navrongo in the year of adoption. The 2018 Navrongo financial statements should
be prepared using the proposed new accounting standard on the basis of voluntary
early adoption of the new standard”.
Required:
Explain to the finance director, justifying whether you agree or disagree with the
suggestion above.
SET 02
a. On the other hand the CEO recently attended a seminar and she has prepared a
question for you concerning the issues raised at the seminar
“I was confused regarding a number of references to Fair value and number of

references on the subject. I thought financial statements are prepared on historical cost
basis. Please give me three examples of where fair value might be relevant for us. I was
told the new standard removed an inconsistency in the definition of fair value and
applied three levels of input into measurement of fair values. Please explain how the
new standard defines fair value and what the previous inconsistency was. Please also
explain each level of input and how each level is applied in measuring the fair value
of a particular item in the financial statements.”

C1 Free Problem Solving Session Nov 2019 - Set 3

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PROBLEM SOLVING SESSION

FOR NOV 2019 EXAMS

QUESTION ONE [1]

Details of the progress of the contract at 31st march 2019 are:-

The percentage of performance obligation satisfied is calculated as the agreed

QUESTION TWO [2]

Gains on property revaluation 93,000 33,000

Statements of financial position as at 31 March

QUESTION THREE [3] SET 01 AND 02

“A revised accounting standard that is relevant to Navrongo is expected to be issued

“I was confused regarding a number of references to Fair value and number of

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