CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED

SOLUTION

QUESTION 1

a) Discuss whether or not each Contract 1 are, or contain, lease agreements in

accordance with IFRS 16 Leases. Marks

A contract is, or contains, a lease if the contract conveys the right to control the
½
use of an identified asset for a period of time in exchange for consideration. [IFRS
16: 9]
The cargo aircraft in the contract is identifiable as it is explicitly stated and there
are interior and exterior customisation specifications on the aircraft. 1

To assess whether a contract conveys the right to control the use of an identified
asset for a period of time, an entity shall assess whether, throughout the period
of use, the customer has the right to obtain substantially all of the economic ½
benefits from use of the identified asset and the right to direct the use of the
identified asset [IFRS 16: B9]
No any other party will have access to the jet during the lease period. ZimAir
therefore significantly enjoys all of the economic benefits related to the aircraft 1
during the lease period.
A customer has the right to direct the use of an identified asset throughout the
period of use only if either:
a) the customer has the right to direct how and for what purpose the asset
is used throughout the period of use; or
b) the relevant decisions about how and for what purpose the asset is used
1
are predetermined and:
i. the customer has the right to operate the asset
ii. the customer designed the asset in a way that predetermines how
and for what purpose the asset will be used throughout the period
of use.
ZimAir has no right to operate the aircraft as Super Jets Ltd is responsible for
operating the aircraft, using its own crew. ZimAir Ltd is also prohibited from
1
hiring another operator for the aircraft or operating the aircraft itself during the
term of the contract.
Super Jets however also does not have ultimate operating rights as the contract
has legal restrictions with regards to where the aircraft can fly, the cargo to be 1
transported on the aircraft as well as the pickup and delivery dates.
Both parties therefore do not rights control usage of the asset.
½

Where both parties do not rights to control usage of the asset, an assessment
must be made of whether the customer has the right to operate the asset
1
throughout the period of use, without the supplier having the right to change
those operating instructions?
Super Jets does not seem to have any rights to change the operating instructions
as all instructions are stipulated in the contract. 1

Super Jets Ltd is however able to substitute the aircraft at any time during the ½
two-year period.

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

A customer does not have the right to use an identified asset if the supplier has
the substantive right to substitute the asset throughout the period of use.
A supplier’s right to substitute an asset is substantive only if both of the
following conditions exist:
1
a) the supplier has the practical ability to substitute alternative assets
throughout the period of use; and
b) the supplier would benefit economically from the exercise of its right to
substitute the asset
It is highly unlikely that Super Jets will substitute the aircraft because of the
substantial customisation cost, hence it does not have any substitution rights 1

The arrangement therefore contains a lease. 1

Available 12
Max 10

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

b) With regards to Contract 2: Marks

i. Identify the lease commencement date.

The lease commencement date is 1 January 2017 1

ii. Calculate the rate implicit in the lease, as at the lease commencement
date.
N = 5 0.5
PMT = 88,250 0.5
FV = 51,000 [46,000+5,000] 1
PV = 346,500 [340,000+6,500] 1
CMPT I/Y = 12.06%
Therefore, Implicit Interest Rate is 12.06% 1

Available 4
Max 4

iii. Calculate the value of the lease liability and the right-of-use asset, on
the lease commencement date.

FV = 46,000 ½
I = 12.06% ½
PMT = 88,250 ½
N =5 ½
CMPT PV = 343,681
Liability= 343,681-25,000= $318,681 1
Right of use Asset = [343,681 + 3,650] = 347,331 1

Available 4
Max 4

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

iv. Prepare the journal entries in the accounting records of Venus Ltd, to account for the
lease for the year ended 31 December 20.17
$ $
Right of Use of Asset (SFP) 347,331 1
Lease Liability (SFP) 318,681 1
Bank (SFP) 3,650 1
Lease deposit 25,000 1
Depreciation (P/L) [323,650/5] 69,446 1
Accumulated Depreciation (SFP) 69,466 0.5
Finance Cost (P/L) [320,000*12%] 38,433 1
Lease liability (SFP) 38,433 1
Lease liability (SFP) 88,250 1
Bank (SFP) 88,250 0.5
Available 9
Max 9

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

c) With regards to Contract 3: Marks

i. Discuss how Zimoko should recognize revenue from sale of the C-Class
in terms of IFRS 15 revenue by applying the 5-step model. Show
calculations where necessary.
A contract with a customer is identifiable within the scope of IFRS 15 if (IFRS
15.9):
• the contract is approved,
• the rights of each party can be identified,
• the payment terms are identified, 1
• the contract has commercial substance, and
• it is probable that the entity will collect the consideration.
• The parties sign a sale agreement before the customers obtains the ½
car.
• The rights and obligations of each party are clear from the contract as the ½
terms and conditions are stated including the payment terms.
• All the parties involved are not related parties thus the sales are at market ½
terms
• Since payments are immediate, the full consideration is expected to be ½
received
• As such, this agreement should be accounted for within the scope of IFRS ½
15 at the time of signing the sale agreement.
An entity shall account for a performance obligation separately only if the 1
promised good or service is distinct (IFRS 15.22).
A good or service that is promised to a customer is distinct if both of the
following criteria are met (IFRS 15.27):
• the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer
(i.e. the good or service is capable of being distinct); 1
• the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e. the good or
service is distinct within the context of the contract).

ZIMOCO promises its customers the delivery of a motor vehicle as well as 1

maintenance services for the during the first 75,000 kms.
The motor vehicles, as well as the service contract, are regularly sold 1
separately, thus ZIMOCO is capable of selling the motor vehicles separately
without providing maintenance services to its customers and vise versa.
The customers are also capable of benefiting from the motor vehicle or service 1
plan either on its own or with other resources readily available to the customer.
The goods or services are not highly interrelated with other promised goods or 1
services in the contract and significant integration of goods and services is not
required (the motor vehicle and the service plan do not highly depend on each
other) and no significant modification to the performance obligations are
required to fulfil the contract.

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

Consequently, the two performance obligations (the motor vehicle and the 1
service plan) are accounted for separately for revenue purposes.
The transaction price is the amount of consideration ZIMOCO expects to 1
receive from the customers in exchange for transferring goods or services,
excluding amounts received on behalf of third parties. (IFRS 15.47)
The total transaction price that Zimoco expects to receive is fixed at $60 000. 1

Where a contract has 2 or more separate performance obligations, the entity

should allocate the transaction price (based on the stand-alone selling prices)
to each performance obligation in an amount that depicts the amount of 1
consideration to which the entity expects to be entitled in exchange for
transferring the promised goods or services to the customer.
ZIMOCO shall therefore allocate the $60,000 based on the stand alone selling
price of the car, being $55,600 and that of the five-year maintenance plan,
being $6,000 as follows:
Car: 60,000*55,600/61,600 = $54,156
½
Services: 60,000*6,000/61,600 = $5,844 ½
An entity shall recognise revenue when (or as) the entity satisfies a performance ½
obligation by transferring a promised good or service to a customer.

An asset is transferred when the customer obtains control of that asset. Revenue 1
from the sale of the C-Class ($54,156) should therefore be recognised at the
point in time when the customer obtains the car, usually when the car is
delivered to the customer.
Services are recognised over time as the services are rendered. The 1
maintenance service is to be provided after every 15,000 kms. Zimoko
therefore recognise revenue as each maintenance service is performed over
the 5 year period.
Available 17
Max 15

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

ii. Prepare the journal entry to account for the sale of the forty C-Class cars during the
year ended 31 December 2017 in Zimoko
$ $
Bank (SFP) [40*60,000] 2,400,000 1
Revenue (P/L) [40*54,156]+[5,844*15,000/75,000*40] 2,212,992 2
Deferred Revenue [40*5,844*60,000/75,000] 187,008 1
Cost of Sales (P/L) [54,156*100/125] *40 1,732,992 1
Inventory (SFP) 1,732,992 ½
Cost of Sales (P/L) [5,844*100/125] *40*15,000/75,000 37,402 2
Bank (SFP) 37,402 ½
Available 8
Max 8

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

QUESTION 2
a)
(i) Discuss the correct classification of the financial instrument in Marks
transaction 1 from the issuer’s perspective (Shongo Ltd) in accordance
with IAS 32 Financial Instruments: Presentation.
The issuer of a financial instrument should classify the instrument as either a 1
financial liability or an equity instrument according to the:
• substance of the contract, not its legal form, and
• the definitions of financial liability or equity instrument. [IAS 32.15]
The issuer of financial instrument shall however evaluate the terms of the 1
financial instrument to determine whether it contains both a liability and an
equity component.
A financial liability is contractual obligation to deliver cash or another financial 1
asset to another entity or
to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity;
Equity instruments are instruments that evidence a residual interest in the assets 1
of an entity after deducting all of its liabilities.
It appears that the convertible debanture has the following three elements: 1
1. Interest payable the form of coupons payable annually;
2. An obligation to make a payment of prnciple amount in 5 years time
3. A written call option, conferring on Shongo the obligation, but not the
right, to issue shares in five years time
Shongo has a contractual obligation to deliver cash on the coupon payments of 1
the debentures when they fall due which results in a financial liability.
Shongo also has a contractual obligation to deliver cash on the principle amount 1
at maturity which results in a liability
The written call option is a derivative element of the debenture, which will be 1
settled by exchanging a fixed number of shares (4 ordinary shares for every one
debenture), for a fixed face value of the debenture (1,200,000*$3).
Accordingly, this instrument is an equity instrument, as the fixed for fixed
criterion has been met. 1
The contract therefore meets the criterion of a compound financial instrument 1
Shongo should recognises separately the components of a financial instrument 1
that creates a financial liability of the entity and grants an option to the holder
of the instrument to convert it into an equity instrument of the entity.
Available 11
Max 11

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

ii) Prepare the journal entries for the convertible debentures for the year ended
31 December 2016 and 31 December 2017. Ignore tax. Marks
2016 $ $
Bank (SFP) [3,600,000 - 12,000]
3,588,000 2
Financial Liability (SFP)
3,370,040 2
Equity (SCE)
217,960 1

ALTERNATIVE JE
Bank (SFP)
3,600,000 1
Financial Liability (SFP)
3,381,311 2
Equity (SCE) (bal)
218,689 1

Financial Liability (SFP) 1/2

11,271 C
Equity (SCE) 1/2
729 C
Bank 1
12,000 J

Interest Expense (P/L)

408,040 3 fig
Financial Liability (SFP)
408,040

Financial Liability (SFP)

360,000 fig
1
Bank (SFP)
360,000

ALTERNATIVE JE
Interest Expense (P/L)
408,040 3
Bank (SFP) 1/2
360,000
Financial Liability (SFP) 1/2
48,040

2017
Interest Expense (P/L)
413,856 1

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

Financial Liability (SFP)

413,856

Financial Liability (SFP)

360,000
1
Bank (SFP)
360,000

ALTERNATIVE JE
Interest Expense (P/L)
413,856 1
Bank (SFP) 1/2
360,000
Financial Liability (SFP) 1/2
53,856

Available 11
Max 11

Workings

C1
FV 3,600,000 0.5
PMT 360,000 0.5
N 4 0.5
I/Y 12% 0.5
PV - 3,381,311

C2
Liability 3,381,311
Equity 218,689 1

Allocation of Transaction Costs

FL 11,271 0.5
EQ 729 0.5
12,000.00

C3
FV 3,600,000.00 0.5
PMT 360,000.00 0.5
N 4.00 0.5
I/Y EFF 12.11%
PV (3,370,040) 1

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

Question 2(b)
i) Revaluation Jes $ $

(SFP)Building Accumulated Depreciation 547,500.00 1/2

Building Cost (SFP) 12,000,000.00 1/2

Building Cost (SFP) 11,875,000.00 1

Revaluation Surplus (SCE) 422,500.00 1

Revaluation Surplus (SCE) 108,793.75 1

Deferred Tax 108,793.75 1 J

25.75%*422,500 Available 5
MAX 5

ii) 2017 Jes

Depreciation (C1) 556,578.95 3 fig

Accumulated Depreciation 556,578.95

Tax expense (P/L) (C2) 629,180.92 2 fig

Deferred tax (SFP) 629,180.92 1 j

Revaluation Reserve 16,510.86 1 fig

Retained Earnings 16,510.86 1 j

(422,500-108,794)/19

Available 7.00
MAX 7
C1
Useful life

2016 Depreciation 547,500

Depreciable value (12,000,000-1,050,000) 10,950,000

Useful life (10950/547.5 20 1

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

Number of years left in 2017 19 1

CA @01/01/2017 11,875,000

Residual amount 1,300,000.00

Depreciable amount 10,575,000.00 1

2017 Depreciation 556,578.95 1

C2 Deferred Tax

Wear and Tear (25%*12,000,000) 3,000,000.00 1

Depreciation (C1) 556,578.95 1

Taxable Temporary difference 2,443,421.05

Deferred tax (25.75%*2,433,421) 629,180.92 1

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

c) Prepare an internal memo to advise the audit senior of Shongo on the correct classification,
recognition and measurement of the investment in the convertible preference shares of
Touch in transaction 3, in the separate financial statements of Shongo for the financial
reporting period ended 31 December 2017

Marks
MEMO FORMAT 1
Recognition
A financial instrument is a contract that results in one party holding a financial
1
asset and the other holding either a financial liability or equity instrument
The investment in the preference shares will result in Shongo having a right to
receive cash (financial asset) and Touch having being obliged to issue a fixed 1
number of shares for a fixed amount (equity instrument)
The investment is recognised as a financial asset as Shongo is the holder and
will be recognised when Shongo became a party to the contractual provisions
1
of the investment (IFRS 9.3.1.1) i.e. when the holder (Shongo) becomes a party
to the contract on 1 January 2017
Classification
Shongo should classify this financial asset (investment in convertible
preference shares from Torch) as amortised cost, fair value through other
comprehensive income or fair value through profit or loss on the basis of both: 1
a) the entity’s business model for managing the financial assets and
b) the contractual cash flow characteristics of the financial asset.
Amortised cost
Shongo should measure the investment at amortised cost if both the following
conditions are met:
• The investment is held within a business model whose objective is to hold
assets in order to collect contractual cash flows; and 1
• The contractual terms of the financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the
principal amount outstanding (IFRS 9.4.1.2).
The investment held by Shongo results in cashflows in the form of compulsory
dividends payable semi-annually. (interest)
The investment in Preference shares however is compulsorily convertible, thus 1
are equity instruments. Equity instruments do not result in no cashflows on
the principle amount, thus cannot be classified as an amortised cost asset.
Fair Value OCI asset
A financial asset shall be measured at fair value through other comprehensive
income if both of the following conditions are met:
a) the financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling financial
1
assets and
b) the contractual terms of the financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding.

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CTA LEVEL 2 & FT FINANCIAL ACCOUNTING – 2017 FINAL EXAM PAPER 2: SUGGESTED
SOLUTION

The instrument has already failed the cashflow characteristics test, thus
cannot be classified at fair value through other comprehensive income unless 1
if Shongo makes an irrevocable election as per IFRS 9. 4.1.4
There is no irrevocable election that was made, thus the instrument will be
1
classified as a fair value through P/L (FVPL) by default.
Measurement
Except for trade receivables, at initial recognition, an entity shall measure a
financial asset or financial liability at its fair value plus or minus, in the case of
1
a financial asset or financial liability not at fair value through profit or loss,
transaction costs.
The investment will therefore be initially measured at $500,000. 1
Transaction cost of $11 100 should be expensed through profit or loss when
1
incurred.
The investment should subsequently be measured at fair value at the end of
each reporting period with the fair value adjustments recognised in the profit 1
and loss.
AVAILABLE 14
MAX 12

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