INSTITUTE OF CHARTERED SECRETARIES I C S A

AND ADMINISTRATORS IN ZIMBABWE INTERNATIONAL

EXAMINATION QUESTION PAPER

DATE: MAY 2014 TIME: 4 HOURS

PART: C (PROFESSIONAL PROGRAMME I)

SUBJECT: ADVANCED ACCOUNTING & FINANCIAL REPORTING

INSTRUCTIONS TO CANDIDATES

Answer ALL four (4) questions

MARK ALLOCATION

Question 1 30 marks
Question 2 25 marks
Question 3 25 marks
Question 4 20 marks
Total 100 marks

Answer in terms of International Financial Reporting Standards, revised International

Accounting Standards and the Zimbabwe Companies Act (Chapter 24:03). Tax rates quoted are
not necessarily those in the current Finance Act.

Your examination script is the property of ICSAZ and is not to be removed from the examination venue.
QUESTION 1

Takashita and Samurai are in the same line of business. Takashita wanted to
eliminate the rivalry competition and acquired 60% of the ordinary shares of
Samurai Limited on 1 November 2013. The purchase cost was settled by
issuing 280 000 ordinary 50 cents shares of Takashita at $1.25 per share.
$20 000 issue costs were incurred.

The companies’ financial statements for the year ended 31 December 2013
were as follows:

Statement of financial position as at 31 December 2013

Takashita Samurai
$000 $000
ASSETS
Non-current Assets 700 140
Investment in Samurai 350 0

Current assets
Inventories 80 140
Trade Receivables 65 125
Cash 85 45
1280 450
EQUITY & LIABILITIES
Ordinary shares of 50 cents 300
ordinary shares of 100 cents 40
Share premium 150 60
Accumulated profits 250 180
Shareholders capital and reserves 700 280

Non-current liabilities 420 70

Current liabilities 160 100
1280 450

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 2 of 13
Statement of Profit and Loss and other Comprehensive Income for the year
ended 31 December 2013.
Takashita Samurai
$000 $000
Sales revenue 1 260 708
Cost of sales 644 426
Gross profit 616 282
Distribution expenses 248 42
Administrative expenses 130 84
Operating profit 238 156
Interest payables 28 12
Income from Samurai 18 0
Profit before taxation 228 144
Income tax 113 54
Profit after tax 115 90

Statement of changes in equity and reserves extract

Takashita Samurai
$000 $000
Profit for the year 115 90
Dividends paid -15 -30
Retained profit for the year 100 60

Notes relevant to the preparation of group financial statements;

1. Takashita has adopted the full goodwill method in line with IFRS3.

2. Goodwill has been tested at year end and it has been impaired by $23
000. This impairment should be included in the group’s consolidated
administrative expenses.

3. The company’s policy is to account for pre-acquisition dividends as a

reduction of the cost in the investment in subsidiary.

4. At the date of acquisition the value of non-current assets of Samurai at

open market price was $200 000. No depreciation adjustment is made in
the group accounts due to the proximity of the acquisition to the

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 3 of 13
 financial year end. The carrying value of the tangible non-current assets
in Samurai’s accounts at the date of acquisition is deemed to be the year
end value. All other assets and liabilities of Samurai were stated at their
fair value at the time of acquisition.

5. The issue costs of $20 000 incurred in the issue of equity shares had
been charged in the statement of profit and loss and other
comprehensive income of Takashita under the heading “Administrative
expenses”. The Companies Act Chapter 24:03 allows these costs to be
deducted from the share premium account.

6. On 1 December 2013 Samurai paid a dividend of $30 000 and no further

dividends were declared for the year end.

7. There were no inter-company transactions during the financial year and

it is assumed that the profit of Samurai accrues equally over the year. No
shares have been issued by Samurai since the acquisition by Takashita.

REQUIRED:

(a) Critically evaluate the above set of financial statements and notes and
prepare the consolidated statement of financial position and the
statement of profit and loss and other comprehensive income for the
Takashita group for the year ended 31 December 2013.

[Workings should be to the nearest $000]

(i) Group Statement of Financial Position. [11 marks]

(ii) Group Statement of Profit & Loss and other Comprehensive
[5 marks]
Income.
[5 marks]
(iii) Other workings

(b) Discuss how the fair value might be estimated where the purchase
consideration is in the form of share capital and no suitable market price
exists, making reference to shares of an unlisted entity. [4 marks]

(c) Takashita is planning to acquire four large subsidiaries in 2014 in

different locations in order to diversify its product base. The subsidiaries
manufacture products completely different from those of the holding
company. The subsidiaries products and locations are as set out below;

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 4 of 13
 Investment Product Location
Subsidiary 1 Textiles China
Subsidiary 2 Electronics Japan
Subsidiary 3 Cars Thailand
Ital
Subsidiary 4 Chemicals y

The directors of Takashita Limited realise that there is a need to disclose

segmental information but do not understand what the term means or
what are the implications are for the published accounts.

REQUIRED:
Briefly explain to the directors the criteria which should be used to identify
separate reportable segments and advise them on the information which
should be disclosed in the financial statements of each segment. [5 marks]
[Total: 30 marks]

QUESTION 2

Kampar Limited manufactures electric gates in Harare. It owns a factory building,

manufacturing plant and computer equipment which is all related to the
manufacturing of the electric gates. The following information for Kampar Limited
for the year ended 31 December 2013 was presented to you.

(1) Profit before tax for the year ended 31 December 2013 amounts to $211 903.
This profit before tax includes the following items:

$
Profit on sale of manufacturing plant 8 333
Depreciation before change in
accounting estimate 64 818
Interest on bank overdraft 52 190
Increase in allowance of credit losses 5 000
Fine paid 300
Warranty costs 14 000

(2) An extract of the property, plant and equipment note to the draft annual
financial statements of Kampar Limited on 31 December 2013 was as follows.
_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 5 of 13
 You can assume that the information is correct;

Factory Manufacturing Computer

Building Plant Equipment
$ $ $
Carrying amount beginning of year 1 401 600 260 000 38 280
Cost 1 460 000 325 000 47 850
Accumulated depreciation 58 400 65 000 9 570
Depreciation 29 200 30 833 4 785
Disposal 0 29 667 0
Carrying amount end of year 1 372 400 199 500 33 495
Cost 1 460 000 285 000 47 850
Accumulated depreciation 87 600 85 500 14 355

The remaining useful life 47 years 7 years 7 years

The factory building, manufacturing plant and computer equipment were brought
into use on 1 January 2010.

(3) The profit on sale of manufacturing plant is in respect a manufacturing plant

that was sold on 30 July 2013 for $38 000. The original cost price of the
manufacturing plant on 1 January 2010 was $40 000.

(4) A list to support the allowance for credit losses has been submitted to ZIMRA
and only 25% of the allowance will be allowed as a tax deduction.

(5) The directors of Kampar Limited decided to change its accounting estimate in
respect of depreciation on computer equipment. The previous pattern of
depreciation differed from the actual pattern of consumption of the economic
benefits of the computer equipment. A reducing balance method at 10% per
annum will be applied instead of the 10% straight-line method. The effect of
the change has not been recorded in the accounting records. The effect
thereof must be recorded from the beginning of the current financial year.

(6) During 2013 the company received its tax assessment for the year ended 31
December 2012 from ZIMRA. The tax assessment showed that that ZIMRA has
charged a penalty of $300 for the late submission of the tax return ITF12.

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 6 of 13
(7) On 31 December 2013 the Finance Manager of Kampar Limited decided to
make a provision for warranty costs of $14 000 in the financial statements. The
provision is based on sales of a new type of a gate which is guaranteed.

(8) Statement of financial position items on 31 December:

2012 2013
$ $
Allowances for credit sales 75 000 80 000
Insurance premium prepaid 10 000 12 000
Deferred tax liability 26 779 0
Provision for warranty costs 14 000

(9) The following capital allowances (not-pro-rata) are applicable for tax purposes

Factory building 5% straight-line method

Manufacturing plant 20% straight-line method
Computer equipment 3 years straight-line method

(10) Kampar Limited has an assessed loss of $21 564 from the previous year.

(11) The company provides for deferred tax on all temporary differences
according to the comprehensive basis using the financial position approach.

(12) The tax rate remained unchanged at 25% for the last two years.

REQUIRED:
(a) Compute and advise the management of Kampar Limited the taxable income
for the year ended 31 December 2013.
[13 marks]
(b) Using the financial position approach establish the deferred tax movement in
the statement of comprehensive income. [7 marks]
(c) Disclose the profit before tax note to the annual financial statement for the
year ended 31 December 2013 in accordance to the Generally Accepted
Accounting Practice. [5 marks]
[Total: 25 marks]

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 7 of 13
QUESTION 3

Karaoke Limited has carried out business for a number of years as a retailer in
a wide range of commodities. The enterprise operates from a number of retail
outlets across the country. Recently the enterprise has found it necessary to
provide credit facilities to its customers in order to maintain growth in
revenue. As a result of this decision the liability to its bankers has increased
substantially. The financial statements for the entity for the year ended 30
June 2013 has been published and the extracts are provided below, together
with comparative figures for the previous two years.

Statement of profit or loss and other comprehensive income for the year
ended 30 June:
2011 2012 2013
$ million $ million $ million
Sales revenue 3 700 4 400 5 000
Cost of sales 2 500 3 000 3 500
Gross profit 1 200 1 400 1 500
Other operating expenses 1 100 1 280 1 400
Interest from credit sales 90 120 180
Operating profit 190 240 280
Interest payables -50 120 220
Profit before taxation 140 120 60

Tax payable 46 40 20
Profit after tax 94 80 40

Statement of financial position as at 30 June:

2011 2012 2013
$million $million $million
ASSETS
Non-current Assets
Property, plant & equipment 556 580 644
Current assets
Inventories 800 1 080 1 240
Trade Receivables 984 1 100 1 266

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 8 of 13
 Cash 24 24 30
2 364 2 784 3 180

EQUITY AND LIABILITIES

Ordinary shares capital 180 180 180
Accumulated profits and reserves 564 584 564
Shareholders capital and reserves 744 764 744

Current liabilities
Bank loans 640 1 040 1 220
Other interest bearing borrowings 400 400 640
Trade payables 540 540 560
Tax payables 40 40 16
Total Equity and liabilities 2 364 2 784 3 180

Other information:
1. Depreciation charge for the three year was as follows:
Year ended 30 June 2011 2012 2013
$million $million $million
Depreciation 10 120 140

2. The other interest bearing borrowings are secured by a floating charge

over the assets of Karaoke Limited. Their repayment is due on 30 June
2013.

3. Dividends of $60 million were paid in 2011 and 2012. A dividend of $40
has been proposed.

4. The bank loans are unsecured. The maximum lending facility the bank will
provide is $1,260 million.

5. Over the past three years the level of credit sales has been:

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 9 of 13
 Year ended 30 June 2011 2012 2013
$million $million $million
Credit Sales 600 800 1 200

The entity offers extended credit terms to certain products to maintain market
share in a highly competitive environment.

The entity has recently written to its bankers to request to increase the
lending facility. The request was received on 6th October 2013, two weeks
after the publication of the financial statements. The bank is concerned on the
sharp increase of the loans and has asked a report on the performance of
Karaoke Limited for the last three years.

REQUIRED:

Critically evaluate the financial performance and advise the bank on the
performance of Karaoke Limited for the period covered by the financial
statements taking cognizance of the bank’s concern on the rapidly increasing
level of lending. Use of statistical evaluation in your report is recommended.

Advisory Report writing. [15 marks]

Statistical computations supporting your report
[10 marks]
[Total: 25 marks]

QUESTION 4

a) TKH Ltd, recently started a research division in one of its factories and a total
of $110 000 was spent during the current year by the new division. These
costs were paid as follows:
$
General expenses
General overheads 10 000
Depreciation on equipment 4 000
Partitioning cost in the new division 6 000
Direct costs
Sundry 4 000
Patents and licences 2 000

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 10 of 13
 Tablets, chemicals and raw materials 6 000
Salaries
Chemists 50 000
Additional technical personnel 10 000
Administrative personnel 2 000
Consulting fees
General consulting work 6 000
Initial payment for the sharing of knowledge in respect to drug P 10 000
110 000

This expenditure of $110 000 was grouped into three categories (1) $48 000 (2)
$32 000 and (3) $30 000 as shown below.

(1) The new division incurred the following work with regards to development of
five potential drugs:
Costs
Drug incurred
$
P (It is expected that it will be marketed within the next 6
months) 18 000
L (Project has been stopped after initial work) 10 000
Q (It is expected that it will be marketed within the next year
or two) 12 000
M (Is in an early stage of development) 6 000
T (Is in an early stage of development) 2 000
48 000

(2) The division undertook testing and quality control on existing products, of
which development has been completed in prior years. The total costs
amounted to $32 000.
(3) The remaining $30 000 of the division’s expenditure is in respect of general
research undertaken in order to formulate potential new products which
could be manufactured in the future.
The costs of $110 000 were accounted for in the financial statements of TKH
Limited by debiting a fifth thereof against profits for the year. The remainder
was shown in the statement of financial position under Research and
Development costs.

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 11 of 13
 Minutes of the recent director’s meeting in which this matter was discussed,
revealed that it was resolved to write off a fifth of the $110 000 to profit each
year.

REQUIRED:
(i) Discuss and indicate why the current accounting treatment is not
acceptable in accordance with IAS38. No reference to the Framework is [5 marks]
required.
(ii) Show the correct accounting treatment in the financial statements of TKH [5 marks]
Limited.

b) CTM is a retail chain group which constructs its mega stores. During the
year ended 31 December 2013, CTM began work on a new site. On 1
January 2013, a leasehold interest in the site (of 50 years) was purchased
for $20 million. It was further estimated that a further $10 million would
be spent on construction of the building and $4 million on fixtures and
fittings. Past experience has led management of CTM to believe that the
fixtures and fittings would have an average useful economic life of ten
years from first use before requiring replacement.
On 1 January 2013, CTM borrowed $30 million to finance the project. The
$30 million carries no interest but is repayable on 31 December 2015 at a
premium of $9.93 million. Therefore the total amount to be repaid is
$39.93
The mega store is brought into use on 1 January 2014.
Present value factors are shown below:

Years (t) Present value of $1 to be received after t years

5% 10% 15%
1 0.952 0.909 0.87
2 0.907 0.826 0.756
3 0.864 0.751 0.658
4 0.823 0.683 0.572
5 0.784 0.621 0.497

REQUIRED:
(i) Assuming that borrowing costs are capitalised, calculate, the total amount to
_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 12 of 13
 be included in non-current assets in respect of the development at 31 [5 marks]
December 2013.
(ii) Calculate the total amount to be charged to the statement of profit and loss [5 marks]
and other comprehensive income for the year ended 31 December 2014.
[Total: 25 marks]

“End of Examination Paper”

_____________________________________________________________________________________
Advanced Accounting & Financial Reporting: May 2014 Page 13 of 13