Question Tag: Profit or Loss

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  • 7 Marks

FR – Nov 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Determine the amounts to be recognized in profit or loss and other comprehensive income for Wenchi Ltd in respect of an office building.

Wenchi Ltd (Wenchi) is a real estate development company. On January 1, 2022, Wenchi’s office building had a net carrying value of GH¢13.5 million. The property became vacant on April 1, 2022, and was leased to a third party. On October 1, 2022, the property was added to inventory for sale after the lease expired. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and other comprWenchi Ltd (Wenchi) is a real estate development company which has been operating for several years. On January 1, 2022, the office building of Wenchi had a net carrying value of GH¢13.5 million. The cost model was used to value the property. No depreciation had been incurred because the expected residual value was more than the cost due to a buoyant real estate market.

The property became vacant as a result of relocating the company’s operations, and on April 1, 2022, a third party (Dormaa Ltd) was given a six-month short lease to occupy it. The property’s fair value at the time it was leased out was GH¢16.5 million.

Wenchi made the choice to add the property to its inventories of properties for sale in the regular course of business once the lease expired. The property was valued at GH¢15.75 million at 1 October 2022. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2022.ehensive income in respect of the property for the year ended 31 December 2022.

c)

(7 marks)

  • 20 Marks

FR – Nov 2023 – L2 – Q3 – . Preparation of Financial Statements

Prepare the statement of profit or loss and other comprehensive income and the statement of financial position for Sompa Plc.

The following trial balance relates to Sompa Plc (Sompa) as at 30 June 2023:
Additional information:
i) Revenue includes a GH¢15 million sale made on 1 January 2023 of maturing goods, which are not biological assets. The cost of the goods at the date of sale was GH¢10 million.
Sompa is still in possession of the goods (but they have not been included in the inventory count). Sompa has the option to repurchase the goods at any time within three years of the sale at a price of GH¢15 million plus interest of 10% per annum. On 30 June 2023, the option had not been exercised but it is likely that it will be exercised before the date it lapses.
ii) Sompa commenced a research and development project on 1 January 2023. It spent GH¢5 million per month on research until 31 March 2023. The project then passed on into the development stage with an GH¢8 million per month spending from 1 April 2023 to 30 June 2023, when the development of the project was completed. However, on 1 May 2023, the directors of Sompa were confident that the new product would be a commercial success. Expensed research and development costs should be charged to cost of sales.
ii) Non current assets:
Sompa’s property is carried at fair value which at 30 June 2023 was GH¢145 million. The remaining life of the property at the beginning of the year (1 July 2022) was 15 years. Sompa does not make an annual transfer to retained earnings in respect of excess depreciation on revaluation. The company pays tax on profits at the rate of 25%. Plant and equipment is depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged on any non current asset for the year ended 30 June 2023. All depreciation is charged to cost of sales.
iv) The 5% loan note was issued on 1 July 2022 at its nominal value of GH¢100 million incurring direct issue costs of GH¢2.5 million which have been charged to administrative expenses. The loan note will be redeemed after three years at a premium which gives the loan note an effective finance cost of 8% per annum. Annual interest was paid on 30 June 2023.
v) At 30 June 2023, the financial asset equity investments had a fair value of GH¢48 million. There were no acquisitions or disposals of these investments during the year.
vi) A provision of GH¢6 million for current tax for the year ended 30 June 2023 is required.
Additionally, GH¢4 million increase in the deferred tax provision is to be charged to profit or loss.
vii) Sompa paid a dividend of GH¢0.20 per share on 30 March 2023, which was followed by an issue of 50 million equity shares at their full market value of GH¢1.70. At 1 July 2022, Sompa had in issue 100 million shares at full market value of GH¢1 each.
Required: Prepare for Sompa Plc:
a) The Statement of Profit or Loss and other Comprehensive Income for the year ended 30 June 2023.
b) The Statement of Financial Position as at 30 June 2023.
(10 marks)

a) Statement of Profit or Loss and Other Comprehensive Income for the year ended
30 June 2023

b) Statement of Financial Position as at 30 June 2023


Non-current liabilities

Note: The ‘sale’ of the maturing goods is in substance a loan of GH¢15 million carrying interest at 10% per annum. This is because the option is almost certain to be exercised because the expected value of the goods of GH¢25 million is considerably higher than the cost of buying them back.

5. Income tax expense

  • 20 Marks

FA – May 2016 – L1 – SB – Q3 – Financial Statements Preparation

Preparing profit or loss and financial position for Uche & Sons as of September 30, 2015.

The following balances were extracted from the books of Uche and Sons as at September 30, 2015.

Additional Information:
(i) Inventories at September 30, 2015, was valued at N198,712,000
(ii) Rent prepaid at September 30, 2015, amounted to N3,200,000
(iii) Depreciation is to be provided on the motorcycle at the rate of 20% of cost per annum
(iv) Salaries and wages outstanding at September 30, 2015, amounted to N6,024,000
(v) Commission not yet due but already received at the trial balance date was N800,000
(vi) Additional irrecoverable debts of N2,840,000 are to be written off
(vii) Bank interest of N100,000 has fallen due but is yet to be received
(viii) Allowances for receivables are to be adjusted to 5% of receivables
(ix) Drawings by the owner of goods costing N1,600,000 and cheques of N2,400,000 are yet to be recorded

Using the extended trial balance, you are required to prepare:
a. Statement of profit or loss of Uche & Sons for the year ended September 30, 2015
b. Statement of financial position of Uche & Sons as at September 30, 2015

 

  • 1 Marks

FA – MAY 2015 – L1 – SA – Q5 – Depreciation Methods and Accounting for Disposals

Determine the profit or loss on disposal of a motor vehicle after depreciation.

A vehicle was purchased on 1 January 2011 at a cost of N2,000,000 and was depreciated at 25% on cost. It was sold on 31 December 2013 for N1,400,000. Full-year depreciation was charged in the years of purchase and disposal.
Determine the profit or loss on the disposal.
A. N500,000 profit
B. N500,000 loss
C. N900,000 profit
D. N900,000 loss
E. N1,150,000 profit

Answer: C
Explanation:
The total depreciation for the three years (2011–2013) is N1,500,000 (N500,000 per year). The carrying value of the vehicle at the time of sale was N500,000. Since the vehicle was sold for N1,400,000, the profit on disposal is N900,000.

  • 20 Marks

FR – March 2024 – L2 – Q3 – Preparation of Financial Statements

Preparation of the statement of comprehensive income for Skolom Ltd.

The following figures have been extracted from the accounting records of Skolom Ltd on 31 December 2022:

Additional information provided includes notes on Skolom Ltd’s agency arrangements with Keke Ltd, joint venture details, and depreciation policies.

Required:
Prepare for Skolom Ltd in accordance with International Financial Reporting Standards (IFRSs):
a) Statement of Comprehensive Income for the year ended 31 December 2022
b) Statement of Financial Position as at 31 December 2022

 

  • 20 Marks

FR – March 2024 – L2 – Q1 – Group Financial Statements and Consolidation

Consolidation of Chicha Plc and Wale Plc financial statements, involving adjustments for intra-group transactions, non-controlling interest, and goodwill.

On 1 July 2022, Chicha Plc acquired 80% of the ordinary shares of Wale Plc at a cost of GH¢2,570,000. On the same date, it also acquired 50% of Wale Plc’s 10% loan notes at par. The summarised draft financial statements of both companies are:

Statements of Profit or Loss for the year ended 31 March 2023
Chicha Plc Wale Plc
Sales revenue 15,000 6,000
Cost of sales (10,500) (5,000)
Gross profit 4,500 1,000
Operating expenses (1,500) (50)
Loan interest received/(paid) 18.75 (50)
Profit before tax 3,018.75 900
Income tax expense (750) (150)
Profit for the year 2,268.75 750
Statements of Financial Position as at 31 March 2023
Chicha Plc Wale Plc
Non-current assets
Property, plant and equipment 4,830 2,000
Investments 2,820 –
Total Non-current assets 7,650 2,000
Current assets 3,750 2,000
Total assets 11,400 4,000
Equity and liabilities
Equity
Stated capital 2,500 500
Retained earnings 6,400 2,100
Total equity 8,900 2,600
Non-current liabilities
10% loan notes – 500
Current liabilities 2,500 900
Total equity and liabilities 11,400 4,000

The following information is relevant:

  1. The fair values of Wale Plc’s assets were equal to their book values except for its plant, which had a fair value of GH¢800,000 more than its book value at the date of acquisition. The remaining life of all of Wale Plc’s plant at the acquisition date was four years. Depreciation is on a straight-line basis and charged to cost of sales. Wale Plc has not adjusted the value of its plant as a result of the fair valuation of the assets.
  2. In the post-acquisition period, Chicha Plc sold goods to Wale Plc for GH¢3,000,000. These goods had cost Chicha Plc GH¢2,250,000. During the year, Wale Plc had sold GH¢2,500,000 of these goods for GH¢3,750,000.
  3. The current accounts of the two companies were reconciled at the year-end with Wale Plc owing Chicha Plc GH¢187,500.
  4. The goodwill was reviewed for impairment at the end of the reporting period and had suffered an impairment loss of GH¢75,000, which is to be treated as an operating expense.
  5. Chicha Plc’s and Wale Plc’s retained earnings as at 1 April 2022 were GH¢4,131,250 and GH¢1,350,000, respectively. No dividends were paid or declared by either entity during the year.
  6. It is the group policy to value the non-controlling interest at acquisition at fair value. The directors valued the non-controlling interest at GH¢625,000 at the date of acquisition.
  7. Revenues and profits should be deemed to accrue evenly throughout the year.

Required:
Prepare for Chicha Plc a Consolidated Statement of Profit or Loss for the year ended 31 March 2023 and Statement of Financial Position as at 31 March 2023.

Chicha Plc Consolidated Statement of Profit or Loss for the Year Ended 31 March 2023
Sales revenue (15,000 + (9/12 x 6,000) – 3,000 (W3)) 16,500
Cost of sales (10,500 + (9/12 x 5,000) – 3,000 + 125 (W3) + 150 (W2)) (11,525)
Gross profit 4,975
Operating expenses (1,500 + (50 x 9/12) + 75 (W1)) (1,612.5)
Finance costs (50 x 9/12 less 18.75 income) (18.75)
Profit before tax 3,343.75
Income tax expense (750 + (150 x 9/12)) (862.5)
Profit for the year 2,481.25

Profit attributable to:

  • Owners of the parent: 2,413.75
  • Non-controlling interest: 67.5
Chicha Plc Consolidated Statement of Financial Position as at 31 March 2023
Non-current assets
PPE (4,830 + 2,000 + 650 fair valuation (W4)) 7,480
Goodwill (W1) 282.5
Total non-current assets 7,762.5
Current assets (3,750 + 2,000 – 125 unrealised profit (W3) – 187.5 intragroup) 5,437.5
Total assets 13,200

  • 8 Marks

FR – May 2018 – L2 – Q3 – Preparation of Financial Statements

Prepare the statement of profit or loss and other comprehensive income for Binkabi Ltd for the year ended 30 September 2017.

The following trial balance relates to Binkabi Ltd as at 30 September 2017:

Additional information:

i) Binkabi Ltd’s revenue includes GH¢16 million for goods sold to Kofi on 1 October 2016. The terms of the sale are that Binkabi Ltd will incur ongoing service and support costs of GH¢1.2 million per annum for three years after the sale. Binkabi Ltd normally makes a gross profit of 40% on such servicing and support work. Ignore the time value of money.

ii) Administrative expenses include an equity dividend of GH¢12 million paid during the year.

iii) The 5% convertible loan note was issued for proceeds of GH¢20 million on 1 October 2015. It has an effective interest rate of 8% due to the value of its conversion option.

iv) During the year, Binkabi Ltd sold an equity investment for GH¢11 million. At the date of sale, it had a carrying amount of GH¢8.8 million and had originally cost GH¢7 million. Binkabi Ltd has recorded the disposal of the investment. The remaining equity investments (the GH¢26.5 million in the trial balance) have a fair value of GH¢29 million at 30 September 2017. The other reserve in the trial balance represents the net increase in the value of the equity investments as at 1 October 2016. Binkabi Ltd made an irrevocable decision at initial recognition of these instruments to recognise all changes in fair value through other comprehensive income, and makes a transfer of realised profit from the other reserve to income surplus on disposal of the investments. Ignore deferred tax on these transactions.

v) The balance on current tax represents the under/over-provision of the tax liability for the year ended 30 September 2016. The directors have estimated the provision for income tax for the year ended 30 September 2017 at GH¢16.2 million. At 30 September 2017, the carrying amounts of Binkabi Ltd’s net assets were GH¢13 million in excess of their tax base. The income tax rate of Binkabi Ltd is 30%.

vi) Non-current assets

  • The freehold property has a land element of GH¢13 million. The building element is being depreciated on a straight-line basis.
  • Plant and equipment is depreciated at 40% per annum using the reducing balance method.
  • Binkabi Ltd’s brand in the trial balance relates to a product line that received bad publicity during the year, which led to falling sales revenues. An impairment review was conducted on 1 April 2017, which concluded that, based on estimated future sales, the brand had a value in use of GH¢12 million and a remaining life of only three years. However, on the same date as the impairment review, Binkabi Ltd received an offer to purchase the brand for GH¢15 million.
  • Prior to the impairment review, it was being amortised using the straight-line method over a 10-year life. No depreciation/amortisation has yet been charged on any non-current asset for the year ended 30 September 2017. Depreciation, amortisation, and impairment charges are all charged to cost of sales.

Required:
a) Prepare the statement of profit or loss and other comprehensive income for Binkabi Ltd for the year ended 30 September 2017. (8 marks)

b) Prepare the statement of financial position of Binkabi Ltd as at 30 September 2017. (12 marks)

BINKABI LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2017

GH¢’000
Revenue 376,000
Cost of sales (W1) (265,300)
Gross profit 110,700
Distribution costs (17,400)
Administrative expenses (W1) (38,500)
Investment income 1,300
Finance costs (W7) (1,475)
Profit before tax 54,625
Income tax expense (W8) (16,800)
Profit for the year 37,825
Other comprehensive income
Gain on disposal of investments (W2) 2,200
Fair value gain on investments (W2) 2,500
Total comprehensive income 42,525

b)

BINKABI LTD
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2017

GH¢’000
Non-current assets
Property, plant and equipment (W3) 67,500
Intangible asset (W4) 12,500
Investments in equity instruments (W2) 29,000
Total non-current assets 109,000
Current assets
Inventory 38,000
Receivables 44,500
Bank 8,000
Total current assets 90,500
Total assets 199,500
Equity
Share capital 50,000
Equity option 2,000
Income surplus (W4) 55,885
Other reserve (W2) 5,700
Total equity 113,585
Non-current liabilities
Deferred tax (W8) 3,900
Deferred revenue (W5) 2,000
5% convertible loan note (W7) 18,915
Total non-current liabilities 24,815
Current liabilities
Trade payables 42,900
Deferred revenue (W5) 2,000
Tax payable 16,200
Total current liabilities 61,100
Total equity and liabilities 199,500

  • 20 Marks

FR – May 2018 – L2 – Q1 – Group Financial Statements and Consolidation

Prepare the consolidated statement of profit or loss for Tamale Ltd for the year ended 30 September 2017 after acquisition of Navrongo Ltd.

On 1 April 2017, Tamale Ltd acquired 60% of the 4 million ordinary shares of Navrongo Ltd in a share exchange of two shares in Tamale Ltd for three shares in Navrongo Ltd. The issue of shares has not yet been recorded by Tamale Ltd. At the date of acquisition, shares in Tamale Ltd had a market value of GH¢6 each. Below are the summarised draft financial statements of both companies.

Statements of Profit or Loss for the year ended 30 September 2017

Tamale Ltd (GH¢’000) Navrongo Ltd (GH¢’000)
Revenue 85,000 42,000
Cost of Sales (63,000) (32,000)
Gross Profit 22,000 10,000
Distribution Cost (2,000) (2,000)
Administrative Expenses (6,000) (3,200)
Finance Cost (300) (400)
Profit Before Tax 13,700 4,400
Income Tax Expense (4,700) (1,400)
Profit for the Year 9,000 3,000

Statements of Financial Position as at 30 September 2017

Tamale Ltd (GH¢’000) Navrongo Ltd (GH¢’000)
Assets
Non-Current Assets
Property, Plant and Equipment 40,600 12,600
Current Assets 16,000 6,600
Total Assets 56,600 19,200
Equity and Liabilities
Ordinary Shares 10,000 4,000
Retained Earnings 35,400 6,500
Equity 45,400 10,500
Non-Current Liabilities
10% Loan Notes 3,000 4,000
Current Liabilities 8,200 4,700
Total Equity and Liabilities 56,600 19,200

The following information is relevant:

i) At the date of acquisition, the fair values of Navrongo Ltd’s assets were equal to their carrying amounts with the exception of an item of plant, which had a fair value of GH¢2 million in excess of its carrying amount. It had a remaining life of five years at that date (straight-line depreciation is used). Navrongo Ltd has not adjusted the carrying amount of its plant as a result of the fair value exercise.

ii) Sales from Navrongo Ltd to Tamale Ltd in the post-acquisition period were GH¢8 million. Navrongo Ltd made a markup on cost of 40% on these sales. Tamale Ltd had sold GH¢5.2 million (at cost) as at 30 September 2017.

iii) Other than where indicated, profit or loss items are deemed to accrue evenly on a time basis.

iv) Navrongo Ltd’s trade receivables at 30 September 2017 include GH¢600,000 due from Tamale Ltd which did not agree with Tamale Ltd’s corresponding trade payable. This was due to cash in transit of GH¢200,000 from Tamale Ltd to Navrongo Ltd. Both companies have positive bank balances.

v) Tamale Ltd has a policy of accounting for any non-controlling interest at fair value. The fair value of the non-controlling interest in Navrongo Ltd at the date of acquisition was estimated to be GH¢5.9 million. Consolidated goodwill was not impaired at 30 September 2017.

Required:
a) Prepare the consolidated statement of profit or loss for Tamale Ltd for the year ended 30 September 2017.

(8 marks)

b) Prepare the consolidated statement of financial position for Tamale Ltd as at 30 September 2017.

(12 marks)

TAMALE GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2017

GH¢’000
Revenue (85,000 + (42,000 X 6/12) – 8,000 (W7)) 98,000
Cost of sales (or W7) (63,000 + (32,000 x 6/12) – 8,000 intra-grp sales + 200(W2) + 800(W2)) (72,000)
Gross profit 26,000
Distribution costs (2,000 + (2,000 X 6/12)) (3,000)
Administrative expenses (6,000 + (3,200 X 6/12)) (7,600)
Finance costs (300 + (400 X 6/12)) (500)
Profit before tax 14,900
Income tax expense (4,700 + (1,400 X 6/12)) (5,400)
Profit for the year 9,500
Profit attributable to:
Owners of the parent 9,300
Non-controlling interests (W4) 200
Total 9,500

b)

TAMALE GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 2017

GH¢’000
Non-current assets
Property, plant and equipment (40,600 + 12,600 + 2,000 Fv adj. – 200 Dep adj.) 55,000
Goodwill (W3) 4,500
Total non-current assets 59,500
Current assets
(16,000 + 6,600 – 800 pup – 600 interco rec + 200 CIT) (W8) 21,400
Total assets 80,900
Equity
Share capital (10,000 + 9,600 share exch.) 19,600
Retained earnings (W4) 35,700
Equity attributable to parent 55,300
Non-controlling interest (W5) 6,100
Total equity 61,400
Non-current liabilities
10% loan notes (3,000 + 4,000) 7,000
Current liabilities
(8,200 + 4,700 – 400 (W10)) 12,500
Total equity and liabilities 80,900

Workings:

  1. Group structure
    Tamale Ltd owns 60% of Navrongo Ltd
    Non-controlling interest: 40%

    Acquisition date: 1st April 2017
    Reporting date: 30th September 2017
    Mid-year acquisition, six months before year-end.

  2. Net Assets of Navrongo Ltd
Acquisition date (GH¢’000) Reporting date (GH¢’000) Post acquisition movement (GH¢’000)
Stated capital 4,000 4,000 –
Retained earnings 5,000 6,500 1,500
Fair value adjustment (plant) 2,000 2,000 –
Depreciation adjustment (2000/5 x 6/12) – (200) (200)
PUP on inventory (40/140 x (8000 – 5200)) – (800) (800)
Total 11,000 11,500 500
  1. Goodwill computation
GH¢’000
Cost of investment (60% × 4,000 × 2/3 × 6) 9,600
Fair value of NCI at acquisition 5,900
Total 15,500
Less: Net assets at acquisition (W2) (11,000)
Goodwill at acquisition 4,500
  1. Consolidated retained earnings
GH¢’000
Balance at 30/09/2017 (Tamale Ltd) 35,400
Group share of post-acquisition profit (60% x 500) 300
Total retained earnings 35,700
  1. Non-controlling interest (NCI)
GH¢’000
Fair value of NCI at acquisition 5,900
NCI share of post-acquisition profit (40% x 500) 200
Total NCI 6,100
  1. Intragroup trading
Debit (GH¢’000) Credit (GH¢’000)
Cancel intragroup sales/purchases Sales 8,000
Purchases
Eliminate unrealised profit: Cost of sales/income surplus ((8,000 – 5,200) x 40/140) 800
Inventories (SOFP)
  1. Cost of sales
GH¢’000
Tamale Ltd 63,000
Navrongo Ltd (32,000 x 6/12) 16,000
Movement on FV adjustment (W6) 200
Intragroup purchases (W7) (8,000)
Unrealised profit (W7) 800
Total 72,000
  1. Current assets
GH¢’000
Tamale Ltd 16,000
Navrongo Ltd 6,600
Unrealised profit in inventory (W7) (800)
Intercompany receivables (600)
Cash in transit (W10) 200
Total current assets 21,400

 

  • 20 Marks

FR – May 2019 – L2 – Q3 – Preparation of Financial Statements

Preparation of Statement of Profit or Loss and Statement of Financial Position for Frafraha Ltd as at 31 March 2018.

The following trial balance was extracted from the books of Frafraha Ltd (Frafraha) on 31 March 2018:

The following notes may be relevant:

  1. Frafraha applies the revaluation model of IAS 16 Property, Plant & Equipment to its land and buildings. A revaluation took place on 31 March 2017 and resulted in the fair value of GH¢62 million shown above. This figure included GH¢22 million in respect of land. The buildings were deemed to have a 40-year useful economic life remaining at that date. No depreciation has yet been charged for the accounting period ended on 31 March 2018. All depreciation is charged to cost of sales. On 31 March 2018, a further revaluation took place, which revealed a fair value of GH¢24 million for the land and GH¢41 million for the buildings. This is to be recorded in the books in accordance with the accounting policy of Frafraha.
  2. Plant & equipment is being depreciated at 25% per annum straight line from the date of purchase to the date of sale. On 1 October 2017, a piece of plant was purchased at a cost of GH¢12 million. This replaced another piece of plant which had cost GH¢8 million some years ago and was fully depreciated prior to 31 March 2017. A trade-in allowance of GH¢1 million was received for the old plant. The only entries made to record this transaction were to credit cash and debit suspense with the net payment of GH¢11 million. No other item of plant was more than three years old at 1 April 2017.
  3. The inventories figure in the trial balance is the opening inventories balance measured on the first-in, first-out (FIFO) basis. Due to a change in Frafraha’s business, the company decided to change its accounting policy with respect to inventories to a weighted average basis, as follows:
Date FIFO (GH¢’000) Weighted Average (GH¢’000)
31 March 2016 33,200 30,300
31 March 2017 37,300 34,100

Closing inventories at 31 March 2018, measured under the weighted average basis, amounted to GH¢41.2 million.

  1. Intangible assets consist of capitalised development costs of GH¢30 million. These relate to products in development at 1 April 2017. No revenue has yet been earned from any of these products. They are all expected to be successful once ready for market, with the exception of one project. The amount previously capitalised in respect of this project was GH¢6 million. However, adverse developments have led to the decision to abandon the project as it was unlikely to be successful in the marketplace. During the year, further expenditure was incurred on other qualifying projects and was charged to administration expenses. The amounts are as follows:
    • Prototype development costs GH¢3 million.
    • Marketing research to determine the optimal selling strategy GH¢1 million.
    • Basic research which may lead to future projects GH¢4 million.
  2. Frafraha commenced construction of a new warehouse on 1 May 2017. The building was completed and available for use on 30 November 2017. The cost of construction amounted to GH¢9 million, funded out of general borrowings, which comprise two bank loans as follows:
    • GH¢4 million of bank loan finance at 6% interest.
    • GH¢6 million of bank loan finance at 4.5% interest.

    All interest costs have been expensed in the year to 31 March 2018, but no other entries have been passed in respect of this. Ignore any depreciation in relation to the new warehouse.

  3. Corporate tax for the year is estimated at GH¢0.25 million.

Required:

Prepare, in a form suitable for publication to the shareholders of Frafraha Ltd, the Statement of Profit or Loss for the year ended 31 March 2018 and Statement of Financial Position as at 31 March 2018.

Statement of Profit or Loss for the Year Ended 31 March 2018:

Additional Workings:

  • 20 Marks

CR – May 2019 – L3 – Q1 – Consolidated financial statements | Business combinations and consolidation

The question requires the preparation of a consolidated statement of profit or loss and other comprehensive income for HO group for the year ended 30 September 2018, including adjustments for intra-group sales, goodwill impairment, and partial disposal of a subsidiary.

On 1 October 2016, HO acquired 60% of the equity interest of Sunyani, a public limited company in Ghana. The purchase consideration is made up of cash of GH¢40 million and the fair value of the identifiable net assets acquired was GH¢55 million at that date. The fair value of the non-controlling interest (NCI) in Sunyani was GH¢22.5 million on 1 October 2016.

HO wishes to use the ‘full goodwill’ method for all acquisitions. The share capital and retained earnings of Sunyani were GH¢12.5 million and GH¢32.5 million respectively, and other components of equity were GH¢3 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to non-depreciable land. Goodwill has been tested for impairment annually and as at 30 September 2017 had reduced in value by 20%. However, at 30 September 2018, the impairment of goodwill had reversed and goodwill was valued at GH¢1 million above its original value. This upward change in value has already been included in the draft financial statements of HO below prior to the preparation of the group accounts.

HO group:

Draft statements of profit or loss and other comprehensive income for the year ended 30 September 2018

HO (GH¢’000) Sunyani (GH¢’000) Kumasi (GH¢’000)
Revenue 200,000 57,500 35,000
Cost of sales (156,000) (32,500) (18,000)
Gross profit 44,000 25,000 17,000
Other income 10,500 3,500 1,000
Administrative costs (7,500) (4,500) (6,000)
Other expenses (17,500) (9,500) (4,000)
Operating profit 29,500 14,500 8,000
Finance costs (2,500) (1,500) (2,000)
Finance income 3,000 2,500 4,000
Profit before tax 30,000 15,500 10,000
Income tax expense (9,500) (4,500) (2,500)
Profit for the year 20,500 11,000 7,500
Other comprehensive income – revaluation surplus 5,000 – –
Total comprehensive income for year 25,500 11,000 7,500

The following information is relevant:

i) HO disposed of an 8% equity interest in Sunyani on 30 September, 2018 for a cash consideration of GH¢9 million and had accounted for the gain or loss in other income. The carrying value of the net assets of Sunyani Ltd at 30 September, 2018 was GH¢60 million before any adjustments on consolidation. HO accounts for investments in subsidiaries using IFRS 9 financial instruments and has made an election to show gains and losses in other comprehensive income. The carrying value of the investment in Sunyani was GH¢45 million at 30 September 2017 and GH¢47.5 million at 30 September, 2018 before the disposal of the equity interest.

ii) HO acquired 60% of the equity interest of Kumasi Ltd, a limited liability company also in Ghana on 30 September, 2016. The purchase consideration was cash of GH¢35 million. Kumasi’s identifiable net assets were fair valued at GH¢43 million and the non-controlling interest had a fair value of GH¢14 million at that date. On 1 April 2018, HO disposed off a 40% equity interest in Kumasi for a consideration of GH¢25 million. Kumasi’s identifiable net assets were GH¢45 million and the value of the non-controlling interest was GH¢17 million at the date of disposal. The remaining equity interest was fair valued at GH¢20 million. After the disposal, HO exerts significant influence. Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Kumasi had not changed since acquisition. Goodwill had been tested for impairment and found that no impairment was required. No entries had been made in the financial statements of HO for this transaction other than for cash received.

iii) HO sold inventory to Sunyani for GH¢6 million at fair value. HO made a loss on the transaction of GH¢1 million and Sunyani still holds GH¢4 million in inventory at the year end.

iv) On 1 October 2016, HO purchased an item of property, plant and equipment for GH¢6 million and this is being depreciated using the straight line basis over 10 years with a nil residual value. At 30 September 2017, the asset was revalued to GH¢6.5 million but at 30 September 2018, the value of the asset had fallen to GH¢3.5 million. HO uses the revaluation model to value its non-current assets. The effect of the revaluation at 30 September 2018 had not been taken into account in total comprehensive income but depreciation for the year had been charged.

v) On 1 October 2016, HO made an award of 4,000 share options to each of its seven directors. The condition attached to the award was that the directors must remain employed by HO for three years. The fair value of each option at the grant date was GH¢100 and the fair value of each option at 30 September 2018 was GH¢110. At 30 September 2017, it was estimated that three directors would leave before the end of three years. Due to an economic downturn, the estimate of directors who were going to leave was revised to one director at 30 September 2018. The expense for the year as regards the share options had not been included in profit or loss for the current year and no director had left by 30 September 2018.

Required:
Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2018 for the HO group.

HO Ltd
Group: statement of profit or loss and other comprehensive income for the year
ended 30 September 2018

All workings should be rounded off to the nearest GH¢000

 

Note:
Subsidiary status is maintained for Sunyani Ltd since as at 30 September 2018, HO Ltd
controlled 52% (60% – 8%).
For Kumasi Ltd, there will be six months subsidiary status (up to 1 April 2018), and
six months associate status (up to 30 September 2018).

Always remember that impairments recorded against goodwill can never be reversed.
The goodwill in Sunyani Ltd has been increased to GH¢8.5 million (GH¢7.5 million +
GH¢1 million). But impairments recorded against goodwill can never be reversed. As
a result, an amount of GH¢2.5 million (that is, GH¢8.5 million – GH¢6 million) needs
to be charged to profit or loss to undo the reversal and in order to reduce the goodwill
to the right amount of GH¢6 million. This is thus added to other expenses in the
consolidated statement of profit or loss for the year. Notice that in the case of Kumasi
Ltd, the goodwill is not impaired.
(W3)Disposal of shares in Sunyani Ltd
HO, the parent company has not lost control in the disposal transaction over Sunyani
Ltd. Therefore, no profit or loss on disposal should be calculated and recorded in the
consolidated financial statements.
A profit on disposal will have been recorded in the individual accounts of HO,
calculated as:

GH¢000
Proceeds from sale of 8% shares in Sunyani                                                     9,000

Carrying amount of investment disposed (8/60 x GH¢47.5 million)         (6,333)

Profit                                                                                                                          2,667

This profit on disposal must be removed from other income in the consolidated
statement of profit or loss. There will be no consolidated profit or loss on disposal
because control over the subsidiary has not been lost. The current year gain on the
investment in Sunyani Ltd of GH¢2.5 million (GH¢ 47.5 million – GH¢ 45 million) must
also be removed from other comprehensive income.

(W4) Disposal of shares in Kumasi Ltd
Gain on disposal of 40% shares in Kumasi Ltd would be as follows:

Where the control over an investment has been lost as a result of disposal of shares
during the accounting period, then a profit or loss on disposal must be calculated and
included in the consolidated statement of profit or loss. In addition, the results of
Kumasi Ltd should only be consolidated in the statement of profit or loss and other
comprehensive income for the six months to 1 April 2018. Thereafter Kumasi Ltd
should be accounted for using the equity method under IAS 28.
(W5) Intra-group sale
IFRS 10 states that intra-group trading must be eliminated from consolidated revenue
and costs of sales. Any unrealized profits should also be eliminated by increasing cost
of sales. However, if a loss is made on intra-group trading, it may suggest that the
value of the goods have fallen and therefore that the loss is actually realized. The loss
on the sale of the inventory is not eliminated from group profit or loss. Because the
sale is at fair value, the inventory value must have been impaired and therefore the
loss sale must remain realized. However, the revenue and cost of sales GH¢6 million
will be eliminated as normal.

Revaluation loss of property, plant and equipment is first of all charged to other
comprehensive income to the extent that a revaluation reserve or surplus exists for the
specific asset. After that, any excess revaluation loss is recorded in profit or lost as an
expense. In this case, GH¢1, 178 is included in other expenses.
(W7) Share options
The expense of on equity-settled share-based payment scheme with employees is
valued using the fair value of the option at the grant date. This expense is spread over
the vesting period based on the number of options expected to vest. The other side of
the double entry is recorded in equity.

 

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