QUESTION ONE

a) Revaluation of Property:

According to the company policy, property, plant, and equipment should be revalued whenever
material differences arise between book value and fair value. In this case, the property was
revalued from its carrying value of US$2 million on 30 November 2009 to US$2.5 million on 30
November 2010. The exchange rate on 30 November 2010 was US$1 = Shs 2,200.
To account for the revaluation of the property, GNL needs to adjust the carrying value of the
property on its financial statements. The increase in value from US$2 million to US$2.5 million
should be recognized as a revaluation surplus in the equity section of the balance sheet. The
revaluation surplus will be credited with US$0.5 million (US$2.5 million - US$2 million).

b) Inventory Valuation:

Due to the competitor's release of a new model, the selling price of GNL's finished product and
first stage product decreased. GNL needs to adjust the valuation of its inventory to reflect the
lower expected selling price.
To determine the lower of cost and net realizable value (NRV) for inventory valuation, GNL
needs to compare the cost of each item with its estimated selling price. The estimated selling
prices provided are Shs 3.2 million for the finished product and Shs 2.05 million for the first
stage product. GNL should use the lower of these selling prices and the cost of the inventory to
value it on the financial statements.
 

c) Bonus Provision:

The bonus of Shs 4 billion promised to employees should be recognized as an expense in the
financial statements for the year ended 30 November 2010. Since the targeted production was
met, GNL needs to record the bonus liability.
The cash portion of the bonus, which is half of Shs 4 billion, should be recognized as an expense
in the income statement for the year ended 30 November 2010. The share options portion should
be recognized as a liability in the balance sheet with an offsetting entry in equity until the
employees fulfill the service condition on 31 May 2011.

d) Closure of Overseas Branch:

GNL has decided to close an overseas branch. The operating lease on the present buildings of the
branch is non-cancellable and runs until 30 November 2012. GNL has obtained permission to
sublet the building at a rental of Shs 1 billion per year, payable in advance on 1 December.
GNL should recognize the operating lease payments and the sublease income on a straight-line
basis over the lease term. The annual rental expense of Shs 2 billion should be recognized as an
expense in the income statement for the year ended 30 November 2010. The sublease income of
Shs 1 billion should be recognized as income in the same period.

e) Sale and Leaseback:

GNL sold a building to a third party on 1 December 2009 and leased it back under a 20-year
finance lease agreement. The sale price and fair value were Shs 12 billion. The rental is Shs 2
billion per annum, payable in advance, with an implicit interest rate of 18%.
GNL should account for the sale and leaseback transaction as a finance lease. The building
should be derecognized from the balance sheet, and the present value of the minimum lease
payments (Shs 12 billion) should be recognized as a lease liability. The rental payments should
be allocated between interest expense and reduction of the lease liability over the lease term.

f) Defined Benefit Pension Plan:

The improvement in the pension plan on 1 December 2009 should be accounted for as a past
service cost. The present value of the defined benefit obligation increased by Shs 5 billion due to
the improvement.

To account for the improvement in the pension plan, GNL needs to recognize the past service
cost as an expense in the income statement for the year ended 30 November 2010. The increase
of Shs 5 billion should be recognized as a liability in the balance sheet.
It's important to note that the above discussion provides a general framework for the treatment of
the given items in GNL's financial statements. However, the specific calculations and disclosures
may vary based on the detailed information provided in the original question and the applicable
accounting standards (e.g., IFRS or US GAAP). It is recommended to refer to the relevant
accounting standards and consult with accounting professionals to ensure accurate and
appropriate financial reporting.
QUESTION TWO

Answer & Explanation

Efforts have been made to present the answer in a step by step & self-explanatory manner. Please
do go through completely & comment if you need any more clarification. 
 
Step 1: (a) Circumstances for reversal of an impairment loss:
 
Under IAS 36, an impairment loss can be reversed if there is a change in the estimates or
assumptions that were used to determine the asset's recoverable amount. The reversal of the
impairment loss is limited to the amount that would have been determined if no impairment loss
had been recognized in prior years.
 
Therefore, in the case of the printing machines of MPL, if the fair value less cost of disposal
exceeds the carrying amount of the asset, then the impairment loss recognized in the previous
year can be reversed, but only to the extent of the original impairment loss recognized.
 
Step 2: (b) Treatment of printing machines in the financial statements for the year ended 31
March 2021:
 
The printing machines of MPL have suffered an impairment loss due to the rusting and poor
performance caused by the Covid-19 lockdown. 
 
The impairment loss should be recognized in MPL's financial statements for the year ended 31
March 2021. The carrying amount of the printing machines is Shs 540 million, while the
recoverable amount is the higher of fair value less cost of disposal and value in use. 
 
In this case, the recoverable amount is Shs 382 million. Therefore, an impairment loss of Shs 158
million (i.e., Shs 540 million - Shs 382 million) should be recognized in the income statement for
the year ended 31 March 2021. The following journal entry should be made:
 
Impairment loss A/c Dr Shs 158,000,000
Accumulated depreciation - Printing machines A/c Dr  Shs 28,500,000
                       To Printing machines Shs 186,500,000
 
To record impairment loss on printing machines for the year ended 31 March 2022:
 
The value in use for the printing machines has increased from the previous year due to the
improvement in their performance. 
 
However, their fair value less cost of disposal could not be determined as there was no active
market for such printers. Therefore, the carrying amount of the printing machines should be
compared with their value in use, and if the carrying amount exceeds the value in use, then an
impairment loss should be recognized. 
 
In this case, the carrying amount of the printing machines is Shs 354.5 million (i.e., Shs 186.5
million + Shs 28.5 million depreciation for the year), while their value in use is Shs 368 million. 
 
Therefore, no impairment loss should be recognized in the income statement for the year ended
31 March 2022. 
QUESTION THREE

Answer & Explanation

According to IAS 37 (International Accounting Standard 37) on provisions, contingent liabilities,
and contingent assets, the following terms can be defined as:

Contingent liabilities: Contingent liabilities are potential obligations that may arise from past
events but their existence will be confirmed only by the occurrence or non-occurrence of
uncertain future events that are beyond the control of the entity. The outcome of these events will
determine if an actual liability will be incurred.

Contingent assets: Contingent assets are potential assets that may arise from past events but
their existence will be confirmed only by the occurrence or non-occurrence of uncertain future
events that are beyond the control of the entity. The realization of these assets depends on the
outcome of these events.

Provisions: Provisions are liabilities of uncertain timing or amount that arise from past events,
where it is probable (more likely than not) that an outflow of economic benefits will be required
to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

A liability: A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow of resources embodying economic benefits.

Criteria that need to be satisfied before a provision is recognized in the financial statements
include:
a) It involves a present obligation (legal or constructive) resulting from past events.
b) It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.

c) The amount of the obligation can be reliably estimated.

The need for an accounting standard dealing with provisions arose because prior to the issuance
of IAS 37, there was no specific guidance on how to account for provisions in a consistent and
transparent manner. The standard was introduced to ensure that entities recognize and measure
provisions appropriately, improving the comparability and reliability of financial statements.
Green Miner Ltd. should recognize a provision for the estimated costs of making good the site in
Copper land because the legislation has been passed, and it is virtually certain that an obligation
exists. The estimated cost of $2 million meets the criteria for recognition: there is a present
obligation (resulting from legislation), it is probable that an outflow of economic benefits will be
required (as indicated by the legislation), and a reliable estimate can be made of the amount of
the obligation (estimated cost of $2 million). Therefore, Green Miner Ltd. should recognize the
provision in its financial statements in accordance with IAS 37.

Contingent liabilities.  - Contingent liabilities are potential liabilities which may arise
depending on the outcome of an uncertain future event.

Contingent Assets. - Contingent assets are potential assets which may arise depending on the
outcome of an uncertain future event.

Provisions.- Provisions are liabilities of uncertain timing or amount that are recognized when an
entity has a present obligation as a result of a past event and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation.

A liability - A liability is a present obligation of an entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying economic
benefits.

The criteria that need to be satisfied before a provision is recognized in the financial
statement are: 

1. An entity has a present obligation, as a result of a past event;

2. It is probable that an outflow of resources embodying economic benefits will be required to

settle the obligation; and

3. The amount of the obligation can be estimated reliably.

There was a need for an accounting standard dealing with provisions because prior to its
publication, there was no International Accounting Standard that dealt with the general subject of
accounting for provisions. This lack of guidance meant that entities were unable to account for
potential liabilities and assets, or to recognize and measure provisions correctly.

Green Miner Ltd should recognize a provision for the estimated costs of making good the site
because the criteria for recognition of a provision have been met. The entity has a present
obligation due to a past event (the passing of the legislation by the government of Copper land),
it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation, and the amount of the obligation can be estimated reliably.
 
 
 Contingent liabilities: Contingent liabilities are potential obligations that may arise from past
events, but their existence depends on the occurrence or non-occurrence of uncertain future
events. These future events are beyond the control of the entity. Therefore, the outcome of these
events will determine if an actual liability will be incurred. Examples of contingent liabilities
include pending lawsuits or claims against the company.

Contingent assets: Contingent assets are potential assets that may arise from past events, but
their existence depends on the occurrence or non-occurrence of uncertain future events. Similar
to contingent liabilities, these future events are beyond the control of the entity. The realization
of these assets depends on the outcome of these events. Examples of contingent assets include
potential insurance claims or potential tax refunds.

Provisions: Provisions are recognized liabilities of uncertain timing or amount that arise from
past events. They are recorded when it is probable (more likely than not) that an outflow of
economic benefits will be required to settle the obligation, and a reliable estimate can be made of
the amount of the obligation. Provisions are different from contingent liabilities because they
involve present obligations that are more likely than not to result in an outflow of resources. An
example of a provision is an estimated warranty expense for products sold by a company.

A liability: A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow of resources embodying economic benefits. In simple
terms, a liability is a debt or obligation that the company owes to another party. It can be a
financial obligation such as a loan or accounts payable, or it can be a non-financial obligation
such as an environmental cleanup or employee benefits.

Criteria for recognizing a provision in financial statements:

a) Present obligation: There must be a present obligation, either legal or constructive, resulting
from past events.

b) Probable outflow of resources: It is probable, which means more likely than not, that an
outflow of resources embodying economic benefits will be required to settle the obligation.

c) Reliable estimate: The amount of the obligation can be reliably estimated. This means that
there is sufficient information available to determine a reasonably accurate estimate of the
financial impact of settling the obligation.
The need for an accounting standard like IAS 37 arose because there was a lack of consistent
guidance on how to account for provisions. Prior to its issuance, different entities used different
methods to recognize and measure provisions, resulting in inconsistencies and lack of
comparability in financial reporting. IAS 37 provides specific guidance and criteria for
recognizing and measuring provisions, ensuring that entities report their obligations in a
consistent and transparent manner.
In the case of Green Miner Ltd., they should recognize a provision for the estimated costs of
making good the site in Copper land. This is because the legislation has been passed, indicating a
present legal obligation. Additionally, it is virtually certain that an outflow of economic benefits
(the cost of making good the site) will be required to settle the obligation. Lastly, a reliable
estimate of $2 million can be made for the amount of the obligation. Therefore, in accordance
with IAS 37, Green Miner Ltd. should recognize the provision in its financial statements to
reflect this liability accurately.
QUESTION FOUR

Answer & Explanation

Year 1 
(1.) Sales Revenue 465,000

(2.) Cost of Closing Inventory 57,000

(3.) Cost of Sales 314,500

(4.) Gross Profit 150,500

Year 2
(1.) Sales Revenue 428,000

(2.) Cost of Closing Inventory 36,000

(3.) Cost of Sales 231,000

(4.) Gross Profit 197,000

Step-by-step explanation
Year 1 
(1.) Sales Revenue
Sale (300 x 1,300) 390,000

Sale (50 x 1,500)    75,000

Sales Revenue 465,000

(2.) Cost of Closing Inventory
 Closing Inventory Units = 100 + 100 + 120 - 300 + 90 - 50 = 60
 Cost of Closing Inventory = 60 x 950 = 57,000
(3.) Cost of Sales
 Goods Available For Sale = (100 x 1,000) +  (100 x 900)+ (120 x 800) + (90 x 950) =
371,500
Goods Available For Sale 371,500

Cost of Closing Inventory (57,000)

Cost of Sales 314,500

(4.) Gross Profit
Sales Revenue 465,000
Cost of Sales (314,500)

Gross Profit 150,500

Year 2
(1.) Sales Revenue
Sale (160 x 1,800) 288,000

Sale (70 x 2,000) 140,000

Sales Revenue 428,000

(2.) Cost of Closing Inventory
 Closing Inventory Units = 60 + 150 - 160 + 50 - 70 = 30
 Cost of Closing Inventory = 30 x 1,200 = 36,000
(3.) Cost of Sales
 Goods Available For Sale = 57,000 +  (150 x 1,000)+ (50 x 1,200) = 267,000

Goods Available For Sale 267,000

Cost of Closing Inventory (36,000)

Cost of Sales 231,000

(4.) Gross Profit
Sales Revenue 428,000

Cost of Sales (231,000)

Gross Profit 197,000