BF 220 Financial Reporting, analysis and management control

ASSIGNMENT TWO

INSTRUCTIONS:

1. Attempt all the questions in this assignment in groups of 2 students each.

2. The due date for the assignment is Tuesday 25th February 2020 at
17:30hrs

QUESTION ONE

The following list of balances has been extracted from the records of Kwame plc as at 31
December 2015, the end of Kwame plc’s most recent financial year.

0.50n ordinary share capital 1, 870, 000

Retained earnings – 1 January 2015 513, 500
Goodwill 450, 000
Revaluation reserve 350, 000
General reserve 100, 000
Investment property 1, 000, 000
Land at cost 340, 500
Buildings at cost 200, 000
Accumulated depreciation – buildings – 1 January 2015 5,000
Factory plant and equipment at cost 600, 000
Accumulated depreciation – Plant and equipment – 1 January 2015 78, 500
Furniture and fittings at cost 120, 000
Accumulated depreciation – furniture and fittings – 1 January 2015 10, 750
Motor vehicles at cost 70, 000
Accumulated depreciation – motor vehicles 20, 000
Research and development 470, 000
10% loan notes 500, 000
Trade receivables/payables 162, 630 222, 500
Bank overdraft 6, 250
Inventories at cost – 1 January 2015 425,650
Purchases – raw materials 650, 600
Carriage – raw materials 10, 500
Manufacturing wages 250, 000
Manufacturing overheads 125, 000
Cash 5, 120
Sales 1, 532, 500
Administrative expenses 108, 100
Selling and distribution expenses 166, 000
Legal and professional fees 54, 900

5, 209, 000 5, 209, 000

The following additional information is available:

1. Following an impairment review of receivables as at 31 December 2015 specific invoices
totaling K32, 000 are to be written off.
2. The balance on development expenditure as at 31 December 2015 comprises: K120, 000
spent during the year on the initial training of staff for a proposed customer call centre in an
overseas country with low labour costs. Following social unrest and increasing political
instability in that country Kwame plc decided in November 2012 not to proceed any further
with this project. K350, 000 was spent during the year to make the company’s packaging
process cheaper, more efficient and more environmentally responsible. Kwame plc expects to
incur further development costs of K107, 000 but is on target to introduce the new packaging
process in January 2016. The new process will significantly cut costs, increase output and will
recover all its development costs.

3. During the year ended 31 December 2015 Kwame plc paid a dividend of 3 ngwee per share
for the year ended 31 December 2015.

4. The goodwill arose on 1 January 2015 when Kwame plc purchased and absorbed another
business as a going concern. The directors have been advised that the fair value of the
goodwill was K350, 000 as at 31 December 2015.

5. Some plant and equipment was sold during the year for K440, 000. The carrying value of
the asset sold during the year was K290, 000 (K360, 000 gross revaluation and K70, 000
accumulated depreciation). Kwame plc uses the revaluation model and the revaluation reserve
includes K90, 000 of revaluation surplus relating to the plant and equipment sold during the
year.
Kwame plc’s depreciation policies are:
Land no depreciation
Buildings 5% straight line basis
Plant and equipment 30% reducing balance
Furniture and fittings 35% reducing balance
Motor vehicles 40% on straight line basis

Depreciation for the year ended 31 December 2015 is still to be charged on all assets in use
at the end of the financial year.
6. Kwame plc uses the fair value model for investment properties. The market value of the
company’s investment properties was estimated at K1, 400,000 as at 31
October 2015.
Required
Prepare the Statement of Financial Position of Kwame plc and the Statement of profit or loss
and other comprehensive income for the year ending 31 st December 2015 in accordance
with IAS 1 Presentation of financial statements.

QUESTION TWO

On 1 January 2013, Sally plc bought a ship for K 192,000 million. The ship as a whole
should last for 25 years. The engines, however, will need replacing after 7 years. The
cost price of K 192,000 included about K 22,400 million in respect of the engines

a) Discuss factors that an entity should take into account when judging the useful
life of an asset (4 Marks)
b) Calculate the total depreciation charge that is be charged to the income
statement for the year ended 31 December 2013 (4 Marks)

c) If Sally decides to replace the engines on 31 December 2018 and if the costs
of replacing the ship with a new engine is K24,000 million and Sally sells the
old engine at K 4,000 million
i. What will be the carrying amount of the whole ship on 31 December
2018 (6 Marks)
ii. How much profit or loss will be made on the sale of the old engine?
(3 Marks)
iii. Calculate the total depreciation charge that will be charged to the income
statement for the year ended 31 December 2019 if the new engine will
need to be replaced after 6 years but the useful life of the rest of the
ship remains unchanged (4 Marks)

d) IAS16 Property, Plant and Equipment allows a choice between the cost model
and the revaluation model for measuring property, plant and equipment
subsequent to initial recognition while IAS 40 Investment Property requires an
entity to choose between fair value model and cost model subsequent to initial
recognition of Property, Plant and Equipment.
 Required

Discuss the differences in the way gains and losses are accounted for under
the revaluation model in IAS 16 Property Plant and Equipment and the fair
value model in IAS 40 Investment property subsequent to initial recognition

( 5 Marks)

[Total 25 marks]

QUESTION THREE

a) Billience Airlines is a newly formed domestic Zambian airline company and has
been contracted by the Government of the Republic of Zambia to offer six daily
scheduled flights; 2 daily flights to Eastern Province, 3 daily flights to Western
Province and 1 daily flight to Muchinga Province.

Billience is able to identify the cash flows associated with each of these routes
and each route has separately identifiable assets.

All the routes are running profitably with the exception of the 3 daily flights to
Western Province which are loss making. The aggregate carrying value of the
assets used by Billience to operate the contracted routes is ZMK 7,000 million
(7 billion kwacha). The aggregate net realizable value of the assets is ZMK
5,900 million and the present value of the expected cash flows from the routes
is currently ZMK 9,800 million.

i. Explain what a cash generating unit is and state with reasons how
many cash generating units Billience Airlines has. (4 marks)
ii. Distinguish between the ‘recoverable amount’ and ‘value in use’ of
an asset.
(4 marks)
 iii. State, with reasons, the amount of any impairment loss in the air
route assets, and the value at which they should be reported in the
statement of financial position of Billience Airlines. (4 marks)
b) Billience Airlines has decided to expand its operations by increasing the number
of routes and by acquiring bigger airplanes. The company prepares its accounts
to 31 March each year. On 1April 2013, Billience Airlines acquired an airplane
under a lease from Boeing plc. The fair value of the leased airplane is K 23,450
million and the lease is for six years which is the same as it’s useful economic
life and at the end of which it will have no residual value. Depreciation is
charged on a straight line basis. Billience airlines is responsible for all
maintenance and insurance costs. The lease provides for six yearly payments
of K 4,500 million in advance, the first being made on 1 April 2013. Billience
Airlines’ Finance Director has indicated that the amount involved with this lease
agreement is material.
Required:

i) With the support of information from above, explain why this lease
cannot be accounted for as an operating lease (4 marks)
ii) Show the amounts that will appear in respect of this leased asset in the
income statement of Billience Airlines for the year ended 31 March 2014
to 2019 using the actuarial method and an interest rate implicit in the
lease of 6 % per annum. (6 marks)
iii) Explain why the use level spread method for allocating finance charge
might not be appropriate for this lease (3 marks)
[Total 25 marks]

END OF ASSIGNMENT