EXAMINATION : INTERMEDIATE LEVEL

SUBJECT : FINANCIAL REPORTING00000

CODE : B2

EXAMINATION DATE : WEDNESDAY, 3RD NOVEMBER, 2021

TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)

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GENERAL INSTRUCTIONS

1. There are TWO sections in this paper. Sections A and B which comprise a total
of SIX questions.

2. Answer question ONE in Section A.

3. Answer ANY FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

6. Calculate your answers to the nearest two decimal points where necessary.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 10 printed pages.

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SECTION A
Compulsory Question
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QUESTION 1

(a) Malenga University (MAU) is a private owned University with branches in Kigoma and
Lindi. It admits students from all over the country. Some of the students are sponsored
by the Students Loans’ Board and some are private sponsored. A student must pay
tuition fee and health insurance before being registered. Health insurance collected by
the University is then submitted to Health Insurance Fund owned by the government. It
is MAU’s policy to recognize tuition fee revenue and Health Insurance revenue upon
registration of students.

REQUIRED:
With reference to the relevant accounting standards, analyze the appropriateness of
MAU’s revenue recognition policy. (4 marks)

(b) The following is the trial balance of Makusaro Limited (MALI) as at 31st December,
2020. The company manufactures various kitchen utensils and sell them to retailers.
TZS. TZS.
Sales revenue - 300,000,000
Manufacturing costs 150,000,000 -
Selling and distribution costs 52,500,000 -
Administrative costs 45,000,000 -
Opening inventories 34,500,000 -
Interest on borrowings 7,500,000 -

Provision for income tax - 3,000,000

Advance income tax paid 9,000,000 -

Property, plant and equipment 129,000,000 -
Accumulated depreciation on - 18,000,000
property, plant and equipment
Intangible assets 9,000,000 -
Trade receivables 56,700,000 -
Cash and bank balances 7,087,500 -
Other receivable and prepayments 21,000,000 -
Trade payables - 18,000,000
Provisions for litigation - 7,500,000
Long term borrowings - 47,287,500
Deferred tax - 7,500,000
Share capital (TZS 1,000 each and - 90,000,000
fully paid)
-
Retained earnings __________
30,000,000
521,287,500 521,287,500

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 The following information are relevant to the Makusaro Limited:
i) After closing the accounts and preparing the trial balance, the accountant
discovered that furniture and fittings worth TZS.10,000,000, bought on 30th
September 2018 were not recorded in general ledger.
ii) On 31st March 2020, the Board of Directors made a decision to dispose of a
machine that was beyond repair. The machine was purchased and installed on
1st January, 2016 at a price of TZS.20,000,000. However, because of shortage
of raw materials, production using the machine started on 1st July 2016.
iii) Management changed depreciation method from straight line to reducing
balance method after reviewing consumption pattern of property, plant and
equipment. The change applies to all non-current assets existing at year end.
Depreciation rate remained at 10%.
iv) On 27th November 2020, Makusaro Limited received goods that were sold to
customer on 14th June 2019 under a sale or return agreement, at cost plus 20%.
The invoice value of the goods was TZS.15,000,000, and was included as sales
for the year that ended 31st December 2019.
v) Intangible assets include:
• TZS.2,000,000 that was used during the year for research on accounting
software that the company was to develop.
• TZS.6,000,000 export license has been obtained for exporting a new
product and is effective for five years up to 30th June 2022. The export
license has never been amortized.
• TZS.1,000,000 was paid for website development.

vi) TZS.9,000,000 of the long term borrowings is of current maturity (i.e. will be
repaid within 12 months).
vii) During the year TZS.7,500,000 was paid in full and final settlement of income
tax liability against which a provision of TZS.10,500,000 had been made in the
previous year. Current year’s taxable income exceeds accounting income by
TZS.7,500,000 of which 1,200,000 are permanent differences. Applicable tax
rate for the company is 30%.
viii) On 1st January, 2021 the Board of Directors proposed a final dividend at 15%
for the year ended 31st December 2020.

ix) Closing inventories are valued at TZS.45,000,000.

REQUIRED:
In accordance with the requirements of International Financial Reporting Standards
(IFRS).
(a) Prepare the Statement of Profit or Loss of Makusaro Limited for the year ended
31st December 2020. (8 marks)
(b) Prepare the Statement of Financial Position of Makusaro Limited as at
31st December 2020. (8 marks)
(Total: 20 marks)

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SECTION B
There are FIVE questions. Answer ANY FOUR questions
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QUESTION 2

(a) “A careful analysis of financial statements can help decision makers evaluate an
organization’s past performance and predict its future performance”.

REQUIRED:

Using your knowledge on ratio analysis, how far do you support the quoted statement?
(4 marks)

(b) Kurututu Company Limited (KUCOL) is a retailing company of processed fish fillets.
You are provided with the extracts from the Kurututu Company’s draft financial
statements for two (2) years as follows.
Extracts from Statement of Profit and Loss and Other Comprehensive Income for
the years ended 30th September.
2021 2020
TZS.000,000 TZS.000,000
Turnover from operations 4,250 3,806
Cost of sales (2,140) (2,405)
Gross profit 2,110 1,401
Sales & Distribution costs (930) (520)
Administrative expenses (260) (158)
Operating profit 920 723
Interest expenses (180) (90)
Profit before tax 740 633
Income tax expense (296) (254)
Profit for the period 444 379

Extracts from Statement of Financial Position as at 30th September.

2021 2020
TZS.000,000 TZS.000,000
Assets:
Non-Current assets 1,406 1,120
Current assets
Inventories 206 122
Trade receivables 426 366
Cash - 26
Total Current Assets 632 514
Total assets 2,038 1,634
Equity and liabilities:
Equity
Ordinary shares @ TZS 1.5 528 455
Preference shares 120 166
Share premium 50 -
Revaluation reserve 80 80
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 Retained earnings 546 503
Total equity 1,324 1,204
Current liabilities
Bank overdraft 50 -
Trade payables 308 103
Current tax payables 356 327
Total liabilities 714 430
Total equity and liabilities 2,038 1,634

REQUIRED:

(i) Compute the following financial ratios for KUCOL for the years ended 30th
September 2020 and 2021.
a. Gross profit percentage
b. Net profit percentage
c. Return on capital employed
d. Assets turnover
e. Current ratio
f. Quick ratio
g. Average receivables collection period
h. Average payables period
i. Inventory turnover
(9 marks)

(ii) With the help of calculated ratios in part (i) above, write a brief report commenting
on the operational performance and financial position of KUCOL based on two
years comparison. (7 marks)
(Total: 20 marks)

QUESTION 3

(a) The following are components of financial statements of Nyumba and Banda for the
year 2019. All amounts are in Tanzanian Shillings (TZS).

STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER, 2019

Nyumba Banda
ASSETS
Non-current Assets
Tangible Non-current assets 724,000,000 280,967,500
Investment in Banda 320,000,000
Total Non-current Assets 1,044,000,000 280,967,500
Current Assets
Cash and Bank 116,702,000 114,565,500
Debtors 96,300,000 45,800,000
Stock 23,180,000 84,200,000
Dividend 15,680,000 2,500,000
Total Current Assets 251,862,000 247,065,500
TOTAL ASSETS 1,295,862,000 528,033,000

EQUITY AND LIABILITIES

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 Equity
Share capital TZS (each TZS.400) 840,000,000 280,000,000
Retained earnings 296,000,000 162,033,000
Total Equity 1,136,000,000 442,033,000
Liabilities
Creditors 23,250,000 28,400,000
Dividend 105,000,000 22,400,000
Tax 31,612,000 35,200,000
Total Liabilities 159,862,000 86,000,000
TOTAL EQUITY AND LIABILITIES 1,295,862,000 528,033,000

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31ST DECEMBER,

2019
Nyumba Banda
Sales 1,352,000,000 523,000,000
Cost of Sales (702,400,000) (192,800,000)
Gross Profit 649,600,000 330,200,000
Operating Expenses (285,400,000) (98,620,000)
Operating Profit 364,200,000 231,580,000
Dividend Income 15,680,000 2,500,000
Profit before tax 379,880,000 234,080,000
Corporate tax (90,915,000) (69,474,000)
Profit for the year 288,965,000 164,606,000

Additional Notes

i) Nyumba exchanged its 1 share for 6 shares of Banda at their nominal values and topped
up that consideration with TZS.200 million to acquire 70% shareholding in the latter in
June 2017. Retained earnings of Banda on that date of acquisition was TZS.96.4 million
and fair value of its tangible non-current assets was TZS.60 million above their book value.

ii) Banda sold merchandise to Nyumba for TZS.8 million for which their selling price include
a profit of TZS.2 million. These goods were for resale but only half of those goods had
been sold by 31st December 2019.

iii) Nyumba and Banda declared a dividend of TZS.50 and TZS.32 per share respectively.
Current year dividend was still payable by year end. Neither Nyumba nor Banda had any
dividend payable of the previous year at the beginning of the current year.

iv) Both Nyumba and Banda depreciate tangible non-current assets on reducing balance
method at 20% and 15% respectively.

REQUIRED:
(a) Prepare a Consolidated Statement of Profit or Loss for the year ended 31st December
2019. (8 marks)
(b) Prepare a Consolidated Statement of Financial Position as at 31st December 2019.
(11 marks)
(Total: 20 marks)

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QUESTION 4

MAKABE Limited (MAKALI) is a Public Company that issued 1,000 ordinary shares at
TZS.25,000 during the year 2020 at a premium of TZS.6,250 per share. During the year, the
company sold a property for TZS.7,750,000; such property had a cost of TZS.21,000,000 with
a carrying value of TZS.11,500,000. The company included the profit or loss on disposal in its
cost of sales.

The following is extracts of the Statement of Profit or Loss and Other Comprehensive Income
and Statement of Financial Position for (MAKALI) for the financial year ended 31st December,
2020.

Extract from Statement of Profit or Loss and Other Comprehensive Income for the year
ended 31st December, 2020.

TZS.
Revenue 663,500,000
Cost of Sales 448,750,000
Gross Profit 214,750,000
Marketing and distribution costs (30,750,000)
Administrative costs (63,875,000)
Operating Profit 120,125,000
Income from investments 875,000
Interest paid (16,750,000)
Profit before tax 104,250,000
Income tax expense (37,500,000)
Profit after interest and tax 66,750,000

Extract from Statement of Financial Position as at 31st December

31st December, 2020 31st December, 2019

Assets TZS. TZS.
Non-current Assets 158,000,000 110,625,000
Current Assets 144,125,000 80,875,000
Total Assets 302,125,000 191,500,000
Equity and Liabilities
Total Equity 185,250,000 129,250,000
Non-current Liabilities 61,750,000 13,750,000
Current Liabilities 55,125,000 48,500,000
Total Equity and Liabilities 302,125,000 191,500,000

The following information relating to the company operations are also provided:

i) Non-current assets include plant, property and equipment of TZS.94,750,000 and

TZS.78,000,000 for the year 2020 and 2019 respectively. Intangible assets of
TZS.63,250,000 and TZS.27,500,000 for the year 2020 and 2019 respectively and
investments balance of TZS.5,125,000 for the financial year 2019.

November, 2021 Page 186 of 384

(ii) The carrying amount of property, plant and equipment was as follows:

31st December, 2020 31st December, 2019

TZS. TZS.
Property, Plant and Equipment Cost 181,250,000 147,250,000
Accumulated depreciation (86,500,000) (69,250,000)
Carrying amount 94,750,000 78,000,000

(iii) The Company also sold non-current asset investments during the year for
TZS.6,125,000.

The profit or loss on disposal of the investments was included in the cost of sales.

(iv) Current assets include inventories, receivable and cash in hand as follows:
31st December, 2020 31st December,
2019
TZS. TZS.
Inventories 42,500,000 26,250,000
Receivables 96,250,000 54,250,000
Cash in hand 5,375,000 375,000
144,125,000 80,875,000

(v) Total equity includes share capital of TZS 25,000 per share, share premium, revaluation
reserve and retained earnings are as follows:
31st December, 2020 31st December,
2019
TZS. TZS.
Share Capital (TZS 25,000) 53,750,000 28,750,000
Share premium 43,750,000 37,500,000
Revaluation 27,250,000 22,500,000
Retained earnings 60,500,000 40,500,000

(vi) The Company paid dividends and charged it to the retained earnings
(vii) Long term liability relates to the loan from CRM Bank Ltd
(viii) Current liabilities include trade payables, interests payable and taxation as follows:

31st December, 2020 31st December, 2019

TZS. TZS.
Trade payable 9,375,000 3,000,000
Interest payable 14,500,000 22,250,000
Taxation 31,250,000 23,250,000

REQUIRED:
a) Using the indirect method, prepare MAKALI’s Statement of Cash Flows for the year
ended 31st December 2020 in accordance with IAS 7.
(14 marks)

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b) Explain how useful is the Cash Flow Statement in comparison to the Statement of Profit
or Loss and Other Comprehensive Income. (6
marks)
(Total: 20
Marks)

QUESTION 5

(a) Mr. Gai, an Accountant of Nazareti Limited is having difficult in addressing several
issues related to International Financial Reporting Standard (IFRS) so he has asked for
your assistance and provides you with the following information:

During the year to 31st December, 2019 Nazareti Company Limited started working on
the construction of a manufacturing plant and incurred expenditure as follows:
TZS (Mil.)
1st April, 2019 1,500
st
1 August, 2019 2,400
1st December, 2019 1,800

All of these payments were made out of general borrowings. Construction work was
still underway as at 31st December, 2019. The Company had the following general
borrowings outstanding throughout the year 2019:
Amount of loan Interest for the year
TZS(Mil.) TZS(Mil)
Loan A 10,000 1,150
Loan B 8,000 720
Loan C 5,000 430

REQUIRED:
Write a briefing note to Mr. Gai addressing the following requested issues:
(i) Explanation of the term “borrowing costs” and the accounting treatment of such
costs as per the requirements of IAS 23. (2.5 marks)
(ii) Calculation of the amount of borrowing costs that should be capitalized in
relation to the construction of the manufacturing plant during the year from the
above information. (2.5 marks)
(iii) Description of the term “investment property” and “two models” permitted by
IAS 40 for the measurement of investment property after its initial recognition.
(2.5 marks)
(iv) Explanation on how the two models in part (ii) above differ from the two models
permitted by IAS 16 in relation to the measurement of property, plant and
equipment. (2.5 marks)

(b) On 1st January 2020, Lessor plc leases a machine to Lessee Ltd. The lease term is three
years and lease payments of TZS.1,000,000 per month are required. The machine has
a useful life of eight years and its fair value at 1st January, 2020 was TZS.50,000,000.

November, 2021 Page 188 of 384

 REQUIRED:
(i)Explain why this lease is an operating lease. (4 marks)

(ii)Explain how the machine itself and the lease payments should be dealt with in
the financial statements of Lessor plc, assuming that the company prepares
accounts for the period to 30th June each year. (6 marks)
(Total 20 Marks)
QUESTION 6

(a) “The differences in financial reporting requirements between the public and private
sectors are due largely to the environment in which the entities operate. Private sector
entities will tend to seek profit maximization and operate at arm’s length, whereas
public sector entities tend to focus on service delivery, often at below market terms.
The public sector tends to have many intra-governmental transactions, which are not
always rooted in contracts. They can also have different trigger points as to what may
constitute a past event, such as ministerial directions. These and other factors often
mean that definition and scope need to be tweaked for IFRSs to work for public sector
financial reporting”.

REQUIRED:

(i) Provide your opinion regarding the most suitable accounting framework for the
public sector.
(5 marks)

(ii) In view of the above narrations, explain at least five key definitional differences
between IFRSs and IPSASs. (10 marks)

(b) Nabaki Kwetu Limited (NAKWELI) has two classes of equity instruments, Major and
Prime. Holders of class Major are entitled to a fixed dividend per share and have the
right to participate in any additional dividends declared. Holders of class Prime
participate equally with holders of class Major with respect to any additional
discretionary dividends only. Both classes of shares participate equally in residual
assets on winding up.

The following information is also relevant: -

• Net profit of Nabaki Kwetu Ltd for the period TZS 100,000,000
• Dividends paid to holders of Major: TZS 65,000,000
• Dividends paid to holders of Prime: TZS 25,000,000
• Number of shares outstanding for the period: 2,000,000 for both Major and Prime
classes.
• Nabaki Kwetu Ltd dividends are discretionary.

REQUIRED:
Calculate the Basic Earnings Per Share (EPS) of NAKWELI. (Show all necessary
workings in arriving at your answer). (5 marks)
(Total: 20 marks)

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