Question Tag: Retained Earnings

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  • 6 Marks

FR – Nov 2018 – L2 – Q2c- Financial Reporting Standards and Their Applications

This question requires calculating the adjustments to opening retained earnings and profit or loss due to changes in accounting policies and estimates.

Talensi, a company reporting under IFRS, is considering making the following changes to its financial statements for the year ended 31 December 2017. Talensi presents one year of comparative information.

  1. Changing the method of depreciation of its plant from straight-line depreciation over five years (with a nil residual value) to reducing balance at 20% per annum with effect from 1 January 2017. The plant originally cost GH¢100 million on 1 January 2015.
  2. Changing the basis of valuation of certain non-seasonal inventories from first-in, first-out (FIFO) to weighted average cost (WAC). Inventories were valued as follows under the two different methods:
    31 December 2015 31 December 2016 31 December 2017
    FIFO: GH¢64 million FIFO: GH¢66 million FIFO: GH¢71 million
    WAC: GH¢62 million WAC: GH¢63 million WAC: GH¢67 million
  3. Changing the revenue recognition basis for certain seasonal goods that were first sold in 2015 such that revenue is recognised on delivery to the customer rather than on shipment. This has arisen as a result of a change in delivery arrangements such that, with effect from 1 January 2017, risks are now borne by Talensi until delivery has been made to the customer.
    2015 2016 2017
    Revenue based on shipment date: GH¢50 million GH¢86 million GH¢90 million
    Revenue based on delivery date: GH¢46 million GH¢84 million GH¢88 million

The cost of the seasonal goods is consistently 80% of sales price.

Profit (calculated using existing policies and accounting estimates) was GH¢240 million for the year ended 31 December 2017.

Required:
Calculate the adjustment to opening retained earnings in the statement of changes in equity (including 2016 comparative figures) in the financial statements for the year ended 31 December 2017 and profit or loss for the year ended 31 December 2017.

Opening retained earnings

GH¢ million GH¢ million
Profit using existing policies –
  1. Depreciation method (change in estimate):
    • Old depreciation: 100/5 years = GH¢20 million
    • Revised depreciation (GH¢100 million x 3/5) x 20% = GH¢12 million
  2. Inventory valuation (change in policy):
    • Adjustment to opening inventories (62 – 64) / (63 – 66) = GH¢(2 million) = GH¢3 million
    • Adjustment to closing inventories (67 – 71) = GH¢(4 million)
  3. Revenue recognition (change in nature, not policy):
    • Apply from 1 January 2017 (88 – 90) x 20% = GH¢(0.4 million)

| | GH¢(2 million) | GH¢246.6 million |

(15 ticks @ 0.4 marks = 6 marks)

  • 8 Marks

PT – Dec 2023 – L2 – Q4a – Corporate Tax Liabilities

Explanation of the tax implications of transferring retained earnings to share capital, including deemed dividend tax and stamp duty.

A Nigerian investor (Niger Ltd) in Ghana has the following information relating to its business:

Year Revaluation Reserves (GH¢) Share Capital (GH¢) Retained Earnings (GH¢)
2021 250,000 1,000,000 1,200,000
2020 100,000 600,000 1,350,000

Required:
With relevant computations, comment on the tax implication of the transfer from Retained Earnings to Share Capital. (8 marks)

The transfer of GH¢150,000 from the Retained Earnings account to the Share Capital account is treated as a “deemed dividend”. This triggers the following tax implications:

  1. Deemed Dividend Tax: A tax rate of 8% is applied to the transfer amount.
    Calculation: GH¢150,000 x 8% = GH¢12,000
  2. Stamp Duty: A stamp duty of 0.5% is applicable on the transfer.
    Calculation: GH¢150,000 x 0.5% = GH¢750

Total tax payable: GH¢12,000 (Deemed Dividend Tax) + GH¢750 (Stamp Duty) = GH¢12,750

  • 5 Marks

PT – Nov 2021 – L2 – Q1a – Income Tax Liabilities

Assess the tax payable on a capital transfer from retained earnings to stated capital based on the details provided.

Kawukudi Ltd intends to increase its capital requirement. Therefore, it applied to the Registrar General with the following:

Retained Earnings Account (GHȼ)

  • Balance b/fwd: 100,000
  • Transfer from income statement: 1,200,000
  • Transfer to stated capital: (600,000)
  • Balance c/fwd: 700,000

Required:
Assess with explanation the tax payable under this circumstance.

The transfer of GH¢600,000 as income from the income surplus account to the stated capital is referred to as ‘deemed dividend’. This implies that a tax at the rate of 8% shall be imposed on the transfer. Thus, 600,000 X 8% = GH¢48,000.
There will also be a stamp duty payment of 0.5%. Thus, 0.5% x 600,000 = GH¢3,000.

  • 3 Marks

AT – Nov 2015 – L3 – Q4d – Business income – Corporate income tax

Discussing the tax implications of a bonus issue in the retained earnings of a company.

The following is a statement of retained earnings:

Required:
What is the tax implication, if any, on the above income statement?

Under section 94 of the Internal Revenue Act, 2000 (Act 592), a bonus issue to shareholders constitutes a capitalization of profits.
(1 mark)

The amount of GHS 16,000.00 is considered a dividend payment and should suffer a final withholding tax at the rate of 8%, under section 83 of the Internal Revenue Act 2000, Act 592, and Part IV of the First Schedule.
(2 marks)
  • 4 Marks

BCL – Dec2022 – Q3c – Accounts and audit

Define and explain the terms "retained earnings" and "unclaimed dividend" in a corporate context.

Explain the following:
i) Retained earnings (2 marks)
ii) Unclaimed dividend (2 marks)

i) Retained Earnings:
The retained earnings of a company with shares are the reserves, as defined in Section 70 of the Companies Act, less the amounts of money attributable to:

  • An unrealized appreciation in the value of an asset of the company, other than an appreciation in the value of an asset as would, under normal accounting principles, be credited to the income statement, unless the amount of the appreciation has been transferred to share capital.
  • A balance standing to the credit of the share deals account immediately before the ascertainment of the retained earnings.

ii) Unclaimed Dividend:
Unclaimed dividends are dividends declared by a company but remain unclaimed by the shareholder entitled to the dividend. If unclaimed for a period of three months, the company shall open an interest-bearing unclaimed dividend account and credit to that account the total amount of the unclaimed dividend. If payment of the dividend cannot be made or is not claimed within a further period of twelve months, the company shall pay the amount of the unclaimed dividend plus interest accrued on the amount to the Registrar, who will manage the funds and ensure that they are safely kept until claimed by the rightful owner.

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