Series: MAY 2020

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Question

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest	12
Foreign currency loan interest (correctly translated into GH¢)	84
Foreign currency loan exchange differences on capital	140

In addition, a three-year fixed-rate GH¢2 million loan was taken out on 1 January 2018 at 6.5%. A loan set-up fee was charged at GH¢20,000. This increased the effective interest rate on the loan to 6.88%.

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Answer

GH¢’000
Overdraft	12
Foreign currency loan interest	84
Foreign currency loan exchange differences on capital	–
Effective interest on loan ((2,000 – 20) x 6.88%)	136.2

The maximum amount to capitalize is GH¢232.2k.

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Tags: Borrowing Costs, Capitalization, Foreign Currency Loan, Interest, Overdraft
Level: Level 3

Series: MAY 2020

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Level: Level 3

Series: MAY 2020

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Question

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest	12
Foreign currency loan interest (correctly translated into GH¢)	84
Foreign currency loan exchange differences on capital	140

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Answer

GH¢’000
Overdraft	12
Foreign currency loan interest	84
Foreign currency loan exchange differences on capital	–
Effective interest on loan ((2,000 – 20) x 6.88%)	136.2

The maximum amount to capitalize is GH¢232.2k.

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Tags: Borrowing Costs, Capitalization, Foreign Currency Loan, Interest, Overdraft
Level: Level 3

Series: MAY 2020

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Level: Level 3

Series: MAY 2020

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Question

Nzema prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) with a financial year end of 31 December 2018. On 1 January 2018, Nzema commenced a defined benefit pension plan for a number of head office employees. Under the pension scheme, Nzema has an obligation to provide these staff with agreed post-employment benefits. Nzema carries the actuarial and investment risk associated with the pension scheme.

The following information has been compiled from workings by Nzema’s accounting staff and actuarial reports for the 2018 financial year:

GH¢
Interest income on plan assets	16,500
Employer contributions to plan	550,000
Current service cost	600,000
Interest on plan liability	18,000
Fair value of plan assets at 31/12/2018	580,000
Present value of plan obligation at 31/12/2018	620,000

The Accountant was not sure which accounting standard to apply when accounting for the pension scheme. The only adjustment made to account for the scheme was to expense the company’s contributions of GH¢550,000 for the 2018 financial year in the Statement of Profit or Loss and Other Comprehensive Income and to credit the ‘Cash’ account.

Required:
Recommend, with appropriate calculations, the necessary accounting treatment for this accounting issue.

Answer

The applicable accounting standard is IAS 19: Employee Benefits. Nzema’s pension plan is a defined benefit plan since Nzema has an obligation to provide agreed post-employment benefits and carries the actuarial and investment risk.

The employer contributions were accounted for incorrectly. Under IAS 19, a defined benefit liability (or asset) is recognized on the balance sheet as the present value of the defined benefit obligation minus the fair value of plan assets.

Workings – Calculation of Actuarial Gain/Loss:

Pension Asset:

Description	GH¢
Opening balance	0
Return on assets	16,500
Employer contributions	550,000
Remeasurement – Actuarial Gain	13,500
Closing balance (31/12/2018)	580,000

Pension Liability:

Description	GH¢
Opening balance	0
Interest Cost	18,000
Current Service Cost	600,000
Remeasurement – Actuarial Loss	2,000
Closing balance (31/12/2018)	620,000

Net Actuarial Gain:
GH¢13,500 (gain on pension assets) – GH¢2,000 (loss on pension liabilities) = GH¢11,500

Journal Entries:

Net Interest Expense (Profit or Loss):
Dr Net Interest Expense (Profit or Loss) GH¢1,500
Cr Pension Liability GH¢1,500
(Net interest expense: 18,000 – 16,500)
Current Service Cost (Profit or Loss):
Dr Current Service Cost GH¢600,000
Cr Pension Liability GH¢600,000
(Recognition of current service cost)
Actuarial Gain (Other Comprehensive Income):
Dr Pension Liability GH¢11,500
Cr Remeasurement – Actuarial Gain (Other Comprehensive Income) GH¢11,500
(Recognition of actuarial gain)
Correction of Previous Accounting Treatment:
Dr Pension Liability GH¢550,000
Cr Pension Contribution Expense (Profit or Loss) GH¢550,000
(Correcting previous entry where contributions were expensed)
Identification of the appropriate standard to be applied: 1 mark
Net interest expense to Profit or Loss: 1 mark
Actuarial gain on pension asset: 1 mark
Actuarial loss on pension liability: 1 mark
Net actuarial gain to OCI: 1 mark
Currents service cost: 1 mark
(Total: 20 marks)

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Level: Level 3

Topic: IAS 19: Employee Benefits
Series: MAY 2020

Topic: IAS 19: Employee Benefits
Series: MAY 2020

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Question

The following information has been compiled from workings by Nzema’s accounting staff and actuarial reports for the 2018 financial year:

GH¢
Interest income on plan assets	16,500
Employer contributions to plan	550,000
Current service cost	600,000
Interest on plan liability	18,000
Fair value of plan assets at 31/12/2018	580,000
Present value of plan obligation at 31/12/2018	620,000

Required:
Recommend, with appropriate calculations, the necessary accounting treatment for this accounting issue.

Answer

Workings – Calculation of Actuarial Gain/Loss:

Pension Asset:

Description	GH¢
Opening balance	0
Return on assets	16,500
Employer contributions	550,000
Remeasurement – Actuarial Gain	13,500
Closing balance (31/12/2018)	580,000

Pension Liability:

Description	GH¢
Opening balance	0
Interest Cost	18,000
Current Service Cost	600,000
Remeasurement – Actuarial Loss	2,000
Closing balance (31/12/2018)	620,000

Net Actuarial Gain:
GH¢13,500 (gain on pension assets) – GH¢2,000 (loss on pension liabilities) = GH¢11,500

Journal Entries:

Net Interest Expense (Profit or Loss):
Dr Net Interest Expense (Profit or Loss) GH¢1,500
Cr Pension Liability GH¢1,500
(Net interest expense: 18,000 – 16,500)
Current Service Cost (Profit or Loss):
Dr Current Service Cost GH¢600,000
Cr Pension Liability GH¢600,000
(Recognition of current service cost)
Actuarial Gain (Other Comprehensive Income):
Dr Pension Liability GH¢11,500
Cr Remeasurement – Actuarial Gain (Other Comprehensive Income) GH¢11,500
(Recognition of actuarial gain)
Correction of Previous Accounting Treatment:
Dr Pension Liability GH¢550,000
Cr Pension Contribution Expense (Profit or Loss) GH¢550,000
(Correcting previous entry where contributions were expensed)
Identification of the appropriate standard to be applied: 1 mark
Net interest expense to Profit or Loss: 1 mark
Actuarial gain on pension asset: 1 mark
Actuarial loss on pension liability: 1 mark
Net actuarial gain to OCI: 1 mark
Currents service cost: 1 mark
(Total: 20 marks)

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Tags: Actuarial Gains/Losses, Defined Benefit Plan, Employee Benefits, Interest on Plan Liability, Pension Liability
Level: Level 3

Topic: IAS 19: Employee Benefits
Series: MAY 2020

Topic: IAS 19: Employee Benefits
Series: MAY 2020

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Question

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

Answer

Inventory and payable

The inventory and trade payable would be recorded initially at GH¢10 million (16 million dinars x GH¢0.6250).
At the year-end on 31 October 2019, the amount payable is still outstanding. It should be re-translated at the closing rate to GH¢12.3 million (16 million dinars x GH¢0.7692).
This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be recognized in profit or loss.
Unless it has been impaired, the inventory (a non-monetary asset) should be recorded at GH¢10 million at the year-end.

Sale of goods

The sale of goods should be recorded at GH¢5 million (8 million dinars x GH¢0.6250) as revenue and as a trade receivable.
Payment in dinars was received on 31 October 2019 and the actual cedi value of the dinars received was GH¢6.2 million (8 million dinars x GH¢0.7692).
This creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognized in profit or loss.

Investment property

The investment property should be recognized on 1 November 2018 at GH¢40 million (56 million dinars x GH¢0.7143).
At the year-end on 31 October 2019, the property should be recognized at its fair value of GH¢36.9 million (48 million dinars x GH¢0.7692).
The fall in fair value (40 – 36.9 = 3.1) should be recognized in profit and loss as a loss on investment property.
The property is a non-monetary asset and when a gain or loss on a non-monetary item is recognized in profit or loss, the element of the gain or loss relating to exchange rates is also recognized in profit or loss.

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Topic: Foreign currency
Series: MAY 2020

Topic: Foreign currency
Series: MAY 2020

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Question

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

Answer

Inventory and payable

The inventory and trade payable would be recorded initially at GH¢10 million (16 million dinars x GH¢0.6250).
At the year-end on 31 October 2019, the amount payable is still outstanding. It should be re-translated at the closing rate to GH¢12.3 million (16 million dinars x GH¢0.7692).
This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be recognized in profit or loss.
Unless it has been impaired, the inventory (a non-monetary asset) should be recorded at GH¢10 million at the year-end.

Sale of goods

The sale of goods should be recorded at GH¢5 million (8 million dinars x GH¢0.6250) as revenue and as a trade receivable.
Payment in dinars was received on 31 October 2019 and the actual cedi value of the dinars received was GH¢6.2 million (8 million dinars x GH¢0.7692).
This creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognized in profit or loss.

Investment property

The investment property should be recognized on 1 November 2018 at GH¢40 million (56 million dinars x GH¢0.7143).
At the year-end on 31 October 2019, the property should be recognized at its fair value of GH¢36.9 million (48 million dinars x GH¢0.7692).
The fall in fair value (40 – 36.9 = 3.1) should be recognized in profit and loss as a loss on investment property.
The property is a non-monetary asset and when a gain or loss on a non-monetary item is recognized in profit or loss, the element of the gain or loss relating to exchange rates is also recognized in profit or loss.

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Series: MAY 2020

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

Question

You have just obtained your full membership with the Institute of Chartered Accountants (Ghana). Following this successful achievement, you have been appointed as the Head of Finance at Asasiyemedeh Company Limited, a Ghanaian company, which provides catering services. Your former employer, Akwaba Limited, is a large public sector organization operating in Accra, where, as the Financial Accountant, you had the opportunity to work on areas relating to financial accounting, procurement, contracts, and bids. One of Asasiyemedeh Company Limited’s major contracts is with Akwaba Limited, your former employer. The contract is now due for renewal, and Asasiyemedeh Company Limited is preparing a competitive bid for this contract.

You have been tasked to lead the team responsible for bidding for this contract, but you are concerned as a professional that you might breach confidentiality if you accept this role. You also suspect that your knowledge and experience of Akwaba Limited were seen as good reasons for appointing you to the position of Head of Finance at Asasiyemedeh Company Limited. You do not in any way want to let your new employer down as you are aware that the loss of such a major contract would have a significant effect on the financial performance of Asasiyemedeh Company Limited, and its performance-related bonus scheme for management members.

Required:
Discuss the ethical issues raised in the above scenario.

Answer

The ethical issues raised in the scenario include:

Objectivity:
There is a self-interest threat that arises due to the impact that losing Akwaba Limited’s contract would have on Asasiyemedeh Company Limited’s financial performance and reward policy. There is also an intimidation threat because other employees in the company may be affected by the financial implications of the contract not being renewed. Additionally, you may feel a strong desire to impress your new employer by helping to secure the renewal of the contract. The key question is whether you can safeguard against the self-interest threat posed by Asasiyemedeh Company Limited’s performance-related bonus scheme.
Confidentiality:
Clearly, there is a confidentiality threat here as you have worked with Akwaba Ltd in the past. Your previous employment with Akwaba Ltd has provided you with information which may be of value to Asasiyemedeh Company Limited. The principle of confidentiality prohibits the use of confidential information acquired as a result of your previous employment for your advantage or that of your current employer. While you have a responsibility to advance the legitimate aims of your employing organization, this should not extend to a breach of confidentiality. In this case, you (because of Asasiyemedeh Company Limited’s performance-related bonus) and Asasiyemedeh Company Limited stand to benefit from the confidential information about how bids are assessed at Akwaba Ltd. The principle would not be breached if you were in possession of information that was in the public domain, or if you were simply to use experience gained in your previous employment, so long as you do not use confidential knowledge that you acquired as a result of that employment. If you accept this role, can you ensure that you do not use confidential information relating to your former employer to your advantage or to the advantage of your current employer? You must be careful and professional as winning that contracts may leads to confidential breaches against you or your current employers perhaps from those bidders of the same contracts who might lose the bids
Professional Behavior:
You must demonstrate professionalism here. For example, what can you do to safeguard your reputation as a professional, the reputation of your employer, and the accountancy profession to which you belong? You must consider the Institute of Chartered Accountants (Ghana) code of ethics, applicable laws (procurement Act 914), and regulations, your current and previous contracts of employment, and your employer’s policies and procedures.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

Question

Required:
Discuss the ethical issues raised in the above scenario.

Answer

The ethical issues raised in the scenario include:

Objectivity:
There is a self-interest threat that arises due to the impact that losing Akwaba Limited’s contract would have on Asasiyemedeh Company Limited’s financial performance and reward policy. There is also an intimidation threat because other employees in the company may be affected by the financial implications of the contract not being renewed. Additionally, you may feel a strong desire to impress your new employer by helping to secure the renewal of the contract. The key question is whether you can safeguard against the self-interest threat posed by Asasiyemedeh Company Limited’s performance-related bonus scheme.
Confidentiality:
Clearly, there is a confidentiality threat here as you have worked with Akwaba Ltd in the past. Your previous employment with Akwaba Ltd has provided you with information which may be of value to Asasiyemedeh Company Limited. The principle of confidentiality prohibits the use of confidential information acquired as a result of your previous employment for your advantage or that of your current employer. While you have a responsibility to advance the legitimate aims of your employing organization, this should not extend to a breach of confidentiality. In this case, you (because of Asasiyemedeh Company Limited’s performance-related bonus) and Asasiyemedeh Company Limited stand to benefit from the confidential information about how bids are assessed at Akwaba Ltd. The principle would not be breached if you were in possession of information that was in the public domain, or if you were simply to use experience gained in your previous employment, so long as you do not use confidential knowledge that you acquired as a result of that employment. If you accept this role, can you ensure that you do not use confidential information relating to your former employer to your advantage or to the advantage of your current employer? You must be careful and professional as winning that contracts may leads to confidential breaches against you or your current employers perhaps from those bidders of the same contracts who might lose the bids
Professional Behavior:
You must demonstrate professionalism here. For example, what can you do to safeguard your reputation as a professional, the reputation of your employer, and the accountancy profession to which you belong? You must consider the Institute of Chartered Accountants (Ghana) code of ethics, applicable laws (procurement Act 914), and regulations, your current and previous contracts of employment, and your employer’s policies and procedures.

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

Question

Recommend the possible courses of action that you will take in order to be ethically responsible as expected from a Professional Accountant.

Answer

Possible courses of action

You should discuss the situation and your obligations with your managing director in the first place and, ask for your involvement in the preparation of the contract bid to be limited. For example, you may be able to contribute to aspects of the bid that do not in any way require you to refer to confidential knowledge about your previous employment with Akwaba Ltd.
If the managing director fails to understand the conflict that you are facing, probably he is not in your profession, you should request that you both discuss the matter with the board chairman or another member of staff. During these discussions, you should refer to the company’s ethical code, if it has one, as well as that of the Institute of Chartered Accountants (Ghana).
If there are no other formal channels available, you should make the entire board aware of your dilemma by writing formally to them. If necessary, you must refuse to take part in the bid without necessary safeguards being implemented.
Ultimately, disassociating yourself from Asasiyemedeh Company Limited may be the only solution. However, before taking such a step, you should seek legal advice on your employment.
Rights and responsibilities (subject to the rules and guidance of the Institute of Chartered Accountants, (Ghana)).
You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in future periods.
Looking at this issue from Asasiyemedeh Company Limited’s perspective, it may be appropriate to suggest to the managing director or the board of your employer that a policy on conflicts of interest be developed and that the remuneration and bonus policy be reviewed in light of this contract bid with Akwaba Ltd.

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Topic: Regulatory Framework and Ethics
Series: MAY 2020

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

Question

Recommend the possible courses of action that you will take in order to be ethically responsible as expected from a Professional Accountant.

Answer

Possible courses of action

You should discuss the situation and your obligations with your managing director in the first place and, ask for your involvement in the preparation of the contract bid to be limited. For example, you may be able to contribute to aspects of the bid that do not in any way require you to refer to confidential knowledge about your previous employment with Akwaba Ltd.
If the managing director fails to understand the conflict that you are facing, probably he is not in your profession, you should request that you both discuss the matter with the board chairman or another member of staff. During these discussions, you should refer to the company’s ethical code, if it has one, as well as that of the Institute of Chartered Accountants (Ghana).
If there are no other formal channels available, you should make the entire board aware of your dilemma by writing formally to them. If necessary, you must refuse to take part in the bid without necessary safeguards being implemented.
Ultimately, disassociating yourself from Asasiyemedeh Company Limited may be the only solution. However, before taking such a step, you should seek legal advice on your employment.
Rights and responsibilities (subject to the rules and guidance of the Institute of Chartered Accountants, (Ghana)).
You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in future periods.
Looking at this issue from Asasiyemedeh Company Limited’s perspective, it may be appropriate to suggest to the managing director or the board of your employer that a policy on conflicts of interest be developed and that the remuneration and bonus policy be reviewed in light of this contract bid with Akwaba Ltd.

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

Question

Phato Ltd, is a Public Limited Liability Company which operates in the service sector in Ghana. Phato Ltd has a business relationship with two other Ghanaian companies, Sakara Ltd and Saadi Ltd, which are public limited liability companies too. The draft statements of financial position of these three companies are as below as at 30 September 2019.

Phato Ltd GH¢ million	Sakara Ltd GH¢ million	Saadi Ltd GH¢ million
Assets:
Non-current assets
Property, plant, and equipment	460.0	150.0
Investment in subsidiaries
Sakara Ltd	365.0
Saadi Ltd	160.0
Investment in Azuri Ltd	24.0
Intangible assets	99.0	15.0
Total Non-current assets	948.0	325.0
Current assets	447.5	240.0
Total assets	1,395.5	565.0
Equity and liabilities:
Equity:
Share capital	460.0	200.0
Other components of equity	36.5	18.5
Retained earnings	447.5	221.0
Total equity	944.0	439.5
Non-current liabilities	247.5	61.5
Current liabilities	204.0	64.0
Total liabilities	451.5	125.5
Total equity and liabilities	1,395.5	565.0

Additional relevant information:

Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd. The cost of the investment comprised cash of GH¢360 million. At acquisition, the fair value of the non-controlling interest in Sakara Ltd was estimated at GH¢146 million. The fair value of the identifiable net assets acquired totaled GH¢417.5 million, including retained earnings of GH¢159.5 million and other components of equity at GH¢13.5 million. The excess in fair value results from non-depreciable land.
Sakara Ltd, on 1 October 2018, acquired 70% of Saadi Ltd for GH¢160 million. The fair value of non-controlling interest was estimated at GH¢36 million. The fair value of the identifiable net assets of Saadi Ltd at acquisition was GH¢181 million, retained earnings GH¢53 million, and other components of equity GH¢10 million.
Phato Ltd acquired a 14% interest in Azuri Ltd for GH¢9 million on 1 October 2017. On 1 April 2019, Phato Ltd acquired an additional 16% interest in Azuri Ltd for GH¢13.5 million, achieving significant influence.
Phato Ltd purchased patents for GH¢5 million and incurred other development costs for product development.
Impairment tests were conducted on Sakara Ltd and Saadi Ltd.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group as at 30 September 2019.

Answer

Phato Ltd Group
Consolidated Statement of Financial Position as at 30 September 2019

Assets	GH¢ million
Non-current assets
Property, plant, and equipment (460 + 150 + 155 + 44.5 + 18)	827.5
Goodwill (W3)	93.5
Intangible assets (99 + 15 + 17.5 – 4.5 -13.5)	113.5
Investment in Azuri (W7)	25.25
Total non-current assets	1,059.75
Current assets	812.5
Total assets	1,872.25

Equity and Liabilities	GH¢ million

Equity attributable to owners of parent

Share capital

460

Retained earnings (W5)

489.41

Other components of equity (W5)

38.05

Total Equity attributable to owners

987.46

Non-controlling interest (W4)

192.29

Total Equity

1,179.75

Non-current liabilities

355.5

Current liabilities

337.0

Total Liabilities

692.5

Total Equity and Liabilities

1,872.25

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Topic: Business combinations and consolidation, Consolidated Financial Statements
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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

Question

Phato Ltd GH¢ million	Sakara Ltd GH¢ million	Saadi Ltd GH¢ million
Assets:
Non-current assets
Property, plant, and equipment	460.0	150.0
Investment in subsidiaries
Sakara Ltd	365.0
Saadi Ltd	160.0
Investment in Azuri Ltd	24.0
Intangible assets	99.0	15.0
Total Non-current assets	948.0	325.0
Current assets	447.5	240.0
Total assets	1,395.5	565.0
Equity and liabilities:
Equity:
Share capital	460.0	200.0
Other components of equity	36.5	18.5
Retained earnings	447.5	221.0
Total equity	944.0	439.5
Non-current liabilities	247.5	61.5
Current liabilities	204.0	64.0
Total liabilities	451.5	125.5
Total equity and liabilities	1,395.5	565.0

Additional relevant information:

Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd. The cost of the investment comprised cash of GH¢360 million. At acquisition, the fair value of the non-controlling interest in Sakara Ltd was estimated at GH¢146 million. The fair value of the identifiable net assets acquired totaled GH¢417.5 million, including retained earnings of GH¢159.5 million and other components of equity at GH¢13.5 million. The excess in fair value results from non-depreciable land.
Sakara Ltd, on 1 October 2018, acquired 70% of Saadi Ltd for GH¢160 million. The fair value of non-controlling interest was estimated at GH¢36 million. The fair value of the identifiable net assets of Saadi Ltd at acquisition was GH¢181 million, retained earnings GH¢53 million, and other components of equity GH¢10 million.
Phato Ltd acquired a 14% interest in Azuri Ltd for GH¢9 million on 1 October 2017. On 1 April 2019, Phato Ltd acquired an additional 16% interest in Azuri Ltd for GH¢13.5 million, achieving significant influence.
Phato Ltd purchased patents for GH¢5 million and incurred other development costs for product development.
Impairment tests were conducted on Sakara Ltd and Saadi Ltd.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group as at 30 September 2019.

Answer

Phato Ltd Group
Consolidated Statement of Financial Position as at 30 September 2019

Assets	GH¢ million
Non-current assets
Property, plant, and equipment (460 + 150 + 155 + 44.5 + 18)	827.5
Goodwill (W3)	93.5
Intangible assets (99 + 15 + 17.5 – 4.5 -13.5)	113.5
Investment in Azuri (W7)	25.25
Total non-current assets	1,059.75
Current assets	812.5
Total assets	1,872.25

Equity and Liabilities	GH¢ million

Equity attributable to owners of parent

Share capital

460

Retained earnings (W5)

489.41

Other components of equity (W5)

38.05

Total Equity attributable to owners

987.46

Non-controlling interest (W4)

192.29

Total Equity

1,179.75

Non-current liabilities

355.5

Current liabilities

337.0

Total Liabilities

692.5

Total Equity and Liabilities

1,872.25

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

Question

On 1 January 2018, Asankragua Ltd (Asankragua) applied to a government agency for a grant to assist with the construction of a factory in Enchi. The proposed construction cost of the factory was GH¢52 million and the company projected that 350 people would be employed after completion. The land was already owned by Asankragua.

On 1 March 2018, the government agency offered to grant a sum amounting to 25% of the factory’s construction cost to a maximum of GH¢13 million. The grant aid was to be advanced on completion and would be repayable on demand if total employment at the factory fell below 300 people within 5 years of completion.

At the financial year end, 31 March 2018, Asankragua had accepted the offer of grant aid and had signed contracts for the construction of the factory at a total cost of GH¢52 million. Construction work was due to commence on 1 April 2018.

By 31 March 2019, the factory had been completed on budget, 400 people were employed ready to commence manufacturing activities, and the government agency agreed that the conditions necessary for the drawdown of the grant had been met.

On 1 April 2019, the factory was brought into use. It was estimated that it would have a ten-year useful economic life. On 1 June 2019, the government agency paid over the agreed GH¢13 million. In addition, the company sought and was paid an employment grant of GH¢1.2 million as employment exceeded original projections. This is expected to be payable annually for 5 years in total, at a rate of GH¢12,000 per additional person employed over 300 in each year. There are no repayment provisions attached to the employment grant.

The directors of Asankragua expect employment levels to exceed 350 people for at least 4 further years from 31 March 2020.

Required:
Demonstrate, showing calculations and relevant entries, how Asankragua Ltd should record the above transactions and events in its financial statements for years ended 31 March 2018, 2019, and 2020.

Answer

Year ended 31 March 2018:
No accounting entry is made in this financial year, as no transaction has yet been entered into. A capital commitment exists and should be disclosed in the notes. The grant approval should be disclosed also.

Year ended 31 March 2019:
At this date, the factory should be recorded at its cost of GH¢52 million. As all conditions for the payment of the grant have been met, recognition should be made of this amount receivable also. As the factory has not yet been brought into use, no depreciation will be charged for the year. Similarly, no amortisation of the grant will take place in the period.

Recognition of factory:
Dr Property, plant & equipment: GH¢52 million
Cr Cash: GH¢52 million (New factory constructed at a cost of GH¢52 million)

Recognition of grant:
Option 1:
Dr Government grant receivable (current asset): GH¢13 million
Cr Property, plant & equipment: GH¢13 million (Government grant approved, not received yet)

Option 2:
Dr Government grant receivable (current asset): GH¢13 million
Cr Deferred income – current liability: GH¢1.3 million
Cr Deferred income – non-current liability: GH¢11.7 million (Government grant approved, not received yet)

Year ended 31 March 2020:
There are several transactions to record based on the new factory. These are (1) depreciation and (2) amortisation of the grant. In addition, the cash was received from the government agency.

Receipt of grant:
Dr Cash: GH¢13 million
Cr Government grant receivable: GH¢13 million (Receipt of cash grant from government agency)

Option 1 (Depreciation of factory):
Dr Profit or loss: GH¢3.9 million
Cr Accumulated Depreciation – PPE: GH¢3.9 million (Depreciation of the cost of factory net of grant over 10 years)

Option 2 (Depreciation of factory):
Dr Profit or loss: GH¢5.2 million
Cr Accumulated Depreciation – PPE: GH¢5.2 million (Depreciation of gross factory cost over 10 years)

Amortisation of grant:
Dr Deferred income: GH¢1.3 million
Cr Profit or loss: GH¢1.3 million (Amortization of grant over 10 years, reflecting the proportional expensing of the factory to which the grant relates)

The employment grant relates entirely to the cost of employing staff in that year. Hence it should be entirely recognized as income in the year ended 31 March 2020.

Recognition of employment grant:
Dr Cash: GH¢1.2 million
Cr Profit or loss: GH¢1.2 million (Recognition of employment grant as income as received)

Initial recognition of the factory in 2019: 1 mark
Page 19 of 28
Recognition of the grant in 2019: 2 marks
Treatment of receipt of grant in 2020: 2 marks
Depreciation of factory in 2020: 1 mark
Treatment of amortization of grant: 1.5 marks
Recognition of employment grant: 1.5 marks

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

Question

The directors of Asankragua expect employment levels to exceed 350 people for at least 4 further years from 31 March 2020.

Answer

Recognition of factory:
Dr Property, plant & equipment: GH¢52 million
Cr Cash: GH¢52 million (New factory constructed at a cost of GH¢52 million)

Recognition of grant:
Option 1:
Dr Government grant receivable (current asset): GH¢13 million
Cr Property, plant & equipment: GH¢13 million (Government grant approved, not received yet)

Receipt of grant:
Dr Cash: GH¢13 million
Cr Government grant receivable: GH¢13 million (Receipt of cash grant from government agency)

Option 1 (Depreciation of factory):
Dr Profit or loss: GH¢3.9 million
Cr Accumulated Depreciation – PPE: GH¢3.9 million (Depreciation of the cost of factory net of grant over 10 years)

Option 2 (Depreciation of factory):
Dr Profit or loss: GH¢5.2 million
Cr Accumulated Depreciation – PPE: GH¢5.2 million (Depreciation of gross factory cost over 10 years)

The employment grant relates entirely to the cost of employing staff in that year. Hence it should be entirely recognized as income in the year ended 31 March 2020.

Recognition of employment grant:
Dr Cash: GH¢1.2 million
Cr Profit or loss: GH¢1.2 million (Recognition of employment grant as income as received)

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Question

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets	GH¢000
Non-Current Assets
Patents and copyrights	75,000
Land and buildings (net)	200,000
Plant and machinery (net)	150,000
Current Assets
Inventories	125,000
Trade receivables	125,000
Bank	37,500
Investments (cost)	100,000
Total Assets	812,500

Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each)	375,000
20% cumulative preference shares (issued at GH¢10 each)	175,000
Retained earnings	(75,000)
Non-current Liabilities
15% Debentures	125,000
Current Liabilities
Interest on debentures	18,750
Trade payables	93,750
Provision for business restructuring	50,000
Provision for legal damages & claims	12,500
Provision for warranties	37,500
Total Equity and Liabilities	812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

The ordinary shares were to be reduced to GH¢5 per share.
The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
The fair values of the assets were agreed at the following values:
- Patents and copyrights: Nil
- Land and buildings: GH¢225,000
- Plant and machinery: GH¢75,000
- Investments: GH¢75,000
- Inventories: GH¢105,000
- Trade receivables: GH¢70,000
The balance on retained earnings is to be eliminated in full.
The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
The accrued debenture interest was to be paid in cash.
Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
The amount set aside for business restructuring was to be eliminated as well.
The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

Answer

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Question

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets	GH¢000
Non-Current Assets
Patents and copyrights	75,000
Land and buildings (net)	200,000
Plant and machinery (net)	150,000
Current Assets
Inventories	125,000
Trade receivables	125,000
Bank	37,500
Investments (cost)	100,000
Total Assets	812,500

Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each)	375,000
20% cumulative preference shares (issued at GH¢10 each)	175,000
Retained earnings	(75,000)
Non-current Liabilities
15% Debentures	125,000
Current Liabilities
Interest on debentures	18,750
Trade payables	93,750
Provision for business restructuring	50,000
Provision for legal damages & claims	12,500
Provision for warranties	37,500
Total Equity and Liabilities	812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

The ordinary shares were to be reduced to GH¢5 per share.
The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
The fair values of the assets were agreed at the following values:
- Patents and copyrights: Nil
- Land and buildings: GH¢225,000
- Plant and machinery: GH¢75,000
- Investments: GH¢75,000
- Inventories: GH¢105,000
- Trade receivables: GH¢70,000
The balance on retained earnings is to be eliminated in full.
The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
The accrued debenture interest was to be paid in cash.
Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
The amount set aside for business restructuring was to be eliminated as well.
The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

Answer

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

Question

Prepare the statement of financial position as at 31 December 2019 for Sasasila Ltd.

Answer

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

Question

Prepare the statement of financial position as at 31 December 2019 for Sasasila Ltd.

Answer

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Question

Answer

To: Managing Director, Gamashie Ltd
From: An Accountant
Date: 01/01/19
Subject: The Financial Position and Performance of Bossman Ltd

Introduction:

This report is based on the financial statements of Bossman Ltd for the years 2016, 2017, and 2018. It includes an analysis of the financial performance and position, with attention to key financial ratios calculated from the attached statements.

Financial Performance:

Revenue Growth: Bossman Ltd has experienced consistent revenue growth at approximately 5% per annum from GH¢18,000,000 in 2016 to GH¢19,845,000 in 2018.
Gross Profit Margin: The gross profit margin improved in 2017 but fell in 2018, indicating fluctuations in cost management. The margins were:
- 2016: 42%
- 2017: 45%
- 2018: 40%
Operating Profit: Operating profit as a percentage of sales showed a similar trend to the gross profit margin. It increased from 25.5% in 2016 to 28.5% in 2017, before falling back to 25% in 2018. The decline in 2018 needs to be investigated to understand the reasons for the reduction.
Profit Before Tax (PBT): PBT decreased from GH¢3,882,000 in 2017 to GH¢3,909,000 in 2018, primarily due to increased finance costs. This indicates an increase in borrowing costs, which requires further investigation.

Financial Position:

Liquidity:
- Current Ratio: The current ratio improved from 0.78 in 2016 to 1.05 in 2018, indicating better liquidity. However, it was below 1 in 2016 and 2017, suggesting that the company may have struggled to meet its short-term obligations during those years.
- Quick Ratio: The quick ratio remained below 0.5 across all three years, highlighting potential issues with converting current assets (excluding inventory) into liquid assets. This indicates the company may be heavily reliant on inventory for liquidity.
Solvency:
- Debt Ratio: The debt ratio increased steadily over the three years from 38.9% in 2016 to 43.2% in 2018, suggesting the company’s reliance on debt financing is increasing. This should be monitored, as it may impact the company’s financial flexibility.
Efficiency:
- Receivables Collection Period: The collection period increased from 29.2 days in 2016 to 58.2 days in 2018. This could indicate deteriorating credit control or extended payment terms.
- Inventory Turnover: Inventory turnover worsened, increasing from 62 days in 2016 to 122.6 days in 2018. This may indicate overstocking or slow-moving inventory, which ties up working capital.

Conclusion:

Bossman Ltd has shown consistent revenue growth but declining profitability. Liquidity has improved, but the quick ratio is concerning. The company’s growing reliance on debt and the extended receivables and inventory turnover periods should be investigated further to identify potential risks to financial stability.

Appendix – Ratio Analysis:

Ratios	2016	2017	2018
Gross Profit Margin	42%	45%	40%
Operating Profit Margin	25.5%	28.5%	25%
Return on Capital Employed	23.6%	27%	24.1%
Debt Ratio	38.9%	41.4%	43.2%
Current Ratio	0.78	0.86	1.05
Quick Ratio	0.36	0.40	0.47
Receivables Collection Period (days)	29.2	43.6	58.2
Inventory Turnover Period (days)	62	94	122.6

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Question

Answer

To: Managing Director, Gamashie Ltd
From: An Accountant
Date: 01/01/19
Subject: The Financial Position and Performance of Bossman Ltd

Introduction:

Financial Performance:

Revenue Growth: Bossman Ltd has experienced consistent revenue growth at approximately 5% per annum from GH¢18,000,000 in 2016 to GH¢19,845,000 in 2018.
Gross Profit Margin: The gross profit margin improved in 2017 but fell in 2018, indicating fluctuations in cost management. The margins were:
- 2016: 42%
- 2017: 45%
- 2018: 40%
Operating Profit: Operating profit as a percentage of sales showed a similar trend to the gross profit margin. It increased from 25.5% in 2016 to 28.5% in 2017, before falling back to 25% in 2018. The decline in 2018 needs to be investigated to understand the reasons for the reduction.
Profit Before Tax (PBT): PBT decreased from GH¢3,882,000 in 2017 to GH¢3,909,000 in 2018, primarily due to increased finance costs. This indicates an increase in borrowing costs, which requires further investigation.

Financial Position:

Liquidity:
- Current Ratio: The current ratio improved from 0.78 in 2016 to 1.05 in 2018, indicating better liquidity. However, it was below 1 in 2016 and 2017, suggesting that the company may have struggled to meet its short-term obligations during those years.
- Quick Ratio: The quick ratio remained below 0.5 across all three years, highlighting potential issues with converting current assets (excluding inventory) into liquid assets. This indicates the company may be heavily reliant on inventory for liquidity.
Solvency:
- Debt Ratio: The debt ratio increased steadily over the three years from 38.9% in 2016 to 43.2% in 2018, suggesting the company’s reliance on debt financing is increasing. This should be monitored, as it may impact the company’s financial flexibility.
Efficiency:
- Receivables Collection Period: The collection period increased from 29.2 days in 2016 to 58.2 days in 2018. This could indicate deteriorating credit control or extended payment terms.
- Inventory Turnover: Inventory turnover worsened, increasing from 62 days in 2016 to 122.6 days in 2018. This may indicate overstocking or slow-moving inventory, which ties up working capital.

Conclusion:

Appendix – Ratio Analysis:

Ratios	2016	2017	2018
Gross Profit Margin	42%	45%	40%
Operating Profit Margin	25.5%	28.5%	25%
Return on Capital Employed	23.6%	27%	24.1%
Debt Ratio	38.9%	41.4%	43.2%
Current Ratio	0.78	0.86	1.05
Quick Ratio	0.36	0.40	0.47
Receivables Collection Period (days)	29.2	43.6	58.2
Inventory Turnover Period (days)	62	94	122.6

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FR – May 2020 – L2 – Q1b – Consolidated Goodwill Calculation

Calculate the goodwill for the acquisition of Shormeh Ltd by Naa Ltd on 1st April 2019.

Question

Calculate the consolidated goodwill that arose on the acquisition date for Naa Ltd’s acquisition of Shormeh Ltd. (3 Marks)

Answer

Goodwill calculation

Description	GH¢000
Purchase consideration:
– Shares (60% x 75,000 shares x 1/3 x GH¢4)	60,000
– Deferred consideration (60% x 75,000 shares x GH¢1.54 x 1/1.1)	63,000
Total	123,000
Fair value of NCI at acquisition date (40% x 75,000 shares x GH¢2.50)	75,000
Net assets at acquisition date	(161,500)
Goodwill	36,500

Alternative Working for goodwill

Description	GH¢000	GH¢000
Purchase consideration	123,000
Share of net assets (60% x GH¢161,500)	(96,900)
Total	26,100
Fair value of NCI at acquisition date	75,000
NCI share of net assets at acquisition date (40% x GH¢161,500)	(64,600)	10,400
Goodwill		36,500

(Marking scheme: 12 ticks @ 0.25 marks each, up to a maximum of 3 marks)

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FR – May 2020 – L2 – Q1b – Consolidated Goodwill Calculation

Calculate the goodwill for the acquisition of Shormeh Ltd by Naa Ltd on 1st April 2019.

Question

Calculate the consolidated goodwill that arose on the acquisition date for Naa Ltd’s acquisition of Shormeh Ltd. (3 Marks)

Answer

Goodwill calculation

Description	GH¢000
Purchase consideration:
– Shares (60% x 75,000 shares x 1/3 x GH¢4)	60,000
– Deferred consideration (60% x 75,000 shares x GH¢1.54 x 1/1.1)	63,000
Total	123,000
Fair value of NCI at acquisition date (40% x 75,000 shares x GH¢2.50)	75,000
Net assets at acquisition date	(161,500)
Goodwill	36,500

Alternative Working for goodwill

Description	GH¢000	GH¢000
Purchase consideration	123,000
Share of net assets (60% x GH¢161,500)	(96,900)
Total	26,100
Fair value of NCI at acquisition date	75,000
NCI share of net assets at acquisition date (40% x GH¢161,500)	(64,600)	10,400
Goodwill		36,500

(Marking scheme: 12 ticks @ 0.25 marks each, up to a maximum of 3 marks)

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FR – May 2020 – L2 – Q1a – Consolidated statement of profit or loss and OCI

Prepare a consolidated statement of profit or loss and other comprehensive income for Naa Ltd and its subsidiary, Shormeh Ltd, for the year ended 30 September 2019.

Question

Answer

Consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2019

Description	GH¢000
Sales revenue (GH¢310,000 + (GH¢155,000 x 6/12) – GH¢10,000)	377,500
Cost of sales (W3)	(228,950)
Gross profit	148,550
Distribution costs (GH¢20,000 + (GH¢10,000 x 6/12))	(25,000)
Admin expenses (GH¢18,000 + (GH¢12,500 x 6/12) + (GH¢2,500/5yrs x 6/12))	(24,500)
Investment income: share of profit from associate (GH¢5,000 x 20% x 6/12)	500
Other investment income (GH¢2,500 – GH¢600 div from associate + GH¢800 x 6/12)	2,300
Finance costs (GH¢1,000 + (GH¢2,800 x 6/12) + (GH¢63,000 x 10% x 6/12))	(5,550)
Profit before tax	96,300
Income tax expense (GH¢22,500 + (GH¢15,500 x 6/12))	(30,250)
Profit for the year	66,050
Other comprehensive income:
Loss on revaluation ((GH¢1,100) – (GH¢1,500 – GH¢1,000))	(600)
Total comprehensive income	65,450

Profit for the year attributable to:

Shareholders of parent (GH¢66,050 – GH¢7,600): GH¢58,450
Non-controlling interest (GH¢40,000 x 6/12 – GH¢750 – GH¢250 x 40%): GH¢7,600
Total: GH¢66,050

Total comprehensive income attributable to:

Shareholders of the parent (GH¢65,450 – GH¢7,800): GH¢57,650
Non-controlling interest (GH¢7,600 + (GH¢1,500 – GH¢1,000 x 40%)): GH¢7,800
Total: GH¢65,450

W2 Net assets – Shormeh Ltd

Description	Acquisition date (GH¢000)	Reporting date (GH¢000)
Share capital	75,000	75,000
Retained earnings:
– Bal b/f	60,000
– Plus (6/12 x GH¢40,000)	20,000
Total	80,000	100,000
Fair value at acquisition date:
a) Land	1,000	1,000
b) Plant	3,000	3,000
– Addition Depreciation (GH¢3m/2yrs x 6/12)	—	(750)
Customer relationship asset at acquisition	2,500	2,500
– Additional amortization (GH¢2.5/5yrs x 6/12)	–	(250)
Total net assets	161,500	180,500

W3 Group cost of sales

Description	GH¢000
Naa Ltd	200,000
Shormeh Ltd (GH¢75,000 x 6/12)	37,500
Intra-group purchases	(10,000)
Additional depreciation (GH¢3m / 2yrs x 6/12)	750
Unrealized profit in inventories:
Sales to Shormeh Ltd (GH¢10,000 x 1/5 x 25/125)	400
Sales to Pamela Ltd (GH¢7,500 x 20% x 25/125)	300
Total	228,950

Goodwill calculation

Description	GH¢000
Purchase consideration:
– Shares (60% x 75,000 shares x 1/3 x GH¢4)	60,000
– Deferred consideration (60% x 75,000 shares x GH¢1.54 x 1/1.1)	63,000
Total	123,000
Fair value of NCI at acquisition date (40% x 75,000 shares x GH¢2.50)	75,000
Net asset at acquisition date	(161,500)
Goodwill	36,500

Alternative Working for goodwill

Description	GH¢000
Purchase consideration	123,000
Share of net assets (60% x GH¢161,500)	(96,900)
Total	26,100
Fair value of NCI at acquisition date	75,000
NCI share of net assets at acquisition date (40% x GH¢161,500)	(64,600)
Total	10,400
Goodwill	36,500

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FR – May 2020 – L2 – Q1a – Consolidated statement of profit or loss and OCI

Prepare a consolidated statement of profit or loss and other comprehensive income for Naa Ltd and its subsidiary, Shormeh Ltd, for the year ended 30 September 2019.

Question

Answer

Consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2019

Description	GH¢000
Sales revenue (GH¢310,000 + (GH¢155,000 x 6/12) – GH¢10,000)	377,500
Cost of sales (W3)	(228,950)
Gross profit	148,550
Distribution costs (GH¢20,000 + (GH¢10,000 x 6/12))	(25,000)
Admin expenses (GH¢18,000 + (GH¢12,500 x 6/12) + (GH¢2,500/5yrs x 6/12))	(24,500)
Investment income: share of profit from associate (GH¢5,000 x 20% x 6/12)	500
Other investment income (GH¢2,500 – GH¢600 div from associate + GH¢800 x 6/12)	2,300
Finance costs (GH¢1,000 + (GH¢2,800 x 6/12) + (GH¢63,000 x 10% x 6/12))	(5,550)
Profit before tax	96,300
Income tax expense (GH¢22,500 + (GH¢15,500 x 6/12))	(30,250)
Profit for the year	66,050
Other comprehensive income:
Loss on revaluation ((GH¢1,100) – (GH¢1,500 – GH¢1,000))	(600)
Total comprehensive income	65,450

Profit for the year attributable to:

Shareholders of parent (GH¢66,050 – GH¢7,600): GH¢58,450
Non-controlling interest (GH¢40,000 x 6/12 – GH¢750 – GH¢250 x 40%): GH¢7,600
Total: GH¢66,050

Total comprehensive income attributable to:

Shareholders of the parent (GH¢65,450 – GH¢7,800): GH¢57,650
Non-controlling interest (GH¢7,600 + (GH¢1,500 – GH¢1,000 x 40%)): GH¢7,800
Total: GH¢65,450

W2 Net assets – Shormeh Ltd

Description	Acquisition date (GH¢000)	Reporting date (GH¢000)
Share capital	75,000	75,000
Retained earnings:
– Bal b/f	60,000
– Plus (6/12 x GH¢40,000)	20,000
Total	80,000	100,000
Fair value at acquisition date:
a) Land	1,000	1,000
b) Plant	3,000	3,000
– Addition Depreciation (GH¢3m/2yrs x 6/12)	—	(750)
Customer relationship asset at acquisition	2,500	2,500
– Additional amortization (GH¢2.5/5yrs x 6/12)	–	(250)
Total net assets	161,500	180,500

W3 Group cost of sales

Description	GH¢000
Naa Ltd	200,000
Shormeh Ltd (GH¢75,000 x 6/12)	37,500
Intra-group purchases	(10,000)
Additional depreciation (GH¢3m / 2yrs x 6/12)	750
Unrealized profit in inventories:
Sales to Shormeh Ltd (GH¢10,000 x 1/5 x 25/125)	400
Sales to Pamela Ltd (GH¢7,500 x 20% x 25/125)	300
Total	228,950

Goodwill calculation

Description	GH¢000
Purchase consideration:
– Shares (60% x 75,000 shares x 1/3 x GH¢4)	60,000
– Deferred consideration (60% x 75,000 shares x GH¢1.54 x 1/1.1)	63,000
Total	123,000
Fair value of NCI at acquisition date (40% x 75,000 shares x GH¢2.50)	75,000
Net asset at acquisition date	(161,500)
Goodwill	36,500

Alternative Working for goodwill

Description	GH¢000
Purchase consideration	123,000
Share of net assets (60% x GH¢161,500)	(96,900)
Total	26,100
Fair value of NCI at acquisition date	75,000
NCI share of net assets at acquisition date (40% x GH¢161,500)	(64,600)
Total	10,400
Goodwill	36,500

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FR – May 2020 – L2 – Q3b – Statement of Financial Position

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Question

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Answer

b) Statement of financial position as at 31 May 2020

Assets	GH¢000	GH¢000
Non-current assets
Property, plant and equipment		39,600

Current assets
Inventory	4,600
Trade and other receivables (7,400 + 200)	7,600
Cash and cash equivalents	700
	12,900
Total assets		52,500

Equity and liabilities
Capital and reserves
Equity shares	21,000
Revaluation reserve	4,700
Accumulated profits	11,800
	37,500
Non-current liabilities
8% Debentures 2024		5,200

Current liabilities
Trade and other payables	7,300
Taxation (2,100 + 400)	2,500
	9,800
Total equity and liabilities		52,500

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FR – May 2020 – L2 – Q3b – Statement of Financial Position

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Question

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Answer

b) Statement of financial position as at 31 May 2020

Assets	GH¢000	GH¢000
Non-current assets
Property, plant and equipment		39,600

Current assets
Inventory	4,600
Trade and other receivables (7,400 + 200)	7,600
Cash and cash equivalents	700
	12,900
Total assets		52,500

Equity and liabilities
Capital and reserves
Equity shares	21,000
Revaluation reserve	4,700
Accumulated profits	11,800
	37,500
Non-current liabilities
8% Debentures 2024		5,200

Current liabilities
Trade and other payables	7,300
Taxation (2,100 + 400)	2,500
	9,800
Total equity and liabilities		52,500

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FR – May 2020 – L2 – Q3a – Preparation of Statement of Profit or Loss

Prepare the statement of profit or loss for Badu Trading Ltd for the year ended 31 May 2020.

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FR – May 2020 – L2 – Q3a – Preparation of Statement of Profit or Loss

Prepare the statement of profit or loss for Badu Trading Ltd for the year ended 31 May 2020.

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FR – May 2020 – L2 – Q2d – Accounting for Government Grants under IAS 20

Explain the financial reporting treatment of government grants in Dambai Ltd’s financial statements under IAS 20.

Question

Dambai Ltd is a large manufacturing company. During the year, it decided to relocate some operations to a regional development area, which offers attractive labour costs and tax incentives. The regional government agreed to contribute GH¢200,000 as a result of Dambai setting up in the regional development area. There are no particular conditions as to what the money should be spent on. The cash was received on 1 August 2019.

Required:
In accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, explain the financial reporting treatment of the above in the financial statements of Dambai for the year ended 31 December 2019.

Answer

The contribution of GH¢200,000 by the regional government is not dependent on
any particular activities of the entity.
The GH¢200,000 should be credited directly to profit or loss as it does not
compensate specific expenses.
Recognition of the GH¢200,000 Government Grant – 2 marks
Treatment of the GH¢200,000 in Profit or Loss – 2 marks

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FR – May 2020 – L2 – Q2d – Accounting for Government Grants under IAS 20

Explain the financial reporting treatment of government grants in Dambai Ltd’s financial statements under IAS 20.

Question

Answer

The contribution of GH¢200,000 by the regional government is not dependent on
any particular activities of the entity.
The GH¢200,000 should be credited directly to profit or loss as it does not
compensate specific expenses.
Recognition of the GH¢200,000 Government Grant – 2 marks
Treatment of the GH¢200,000 in Profit or Loss – 2 marks

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FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August 2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The bond is due for redemption on 31 July 2028 at par. The effective annual interest rate to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognized in Asamankese’s financial statements in respect of the above transaction for the year ended 31 July 2019 (to two decimal places)?

Answer

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FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

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FR – May 2020 – L2 – Q2b – Classification of Discontinued Operations under IFRS 5

Assess the classification of certain operations as discontinued operations under IFRS 5 for two scenarios.

Question

In accordance with IFRS 5: Non-Current Assets held for Sale and Discontinued Operations, explain with reasons whether each of the following could most likely be classified as a discontinued operation in this year’s financial statements:

i) A reportable operating segment that met the definition of held for sale after the year-end but before the financial statements were authorised for issue.
ii) A division of a business, classified as held for sale, that was correctly treated as a discontinued operation in last year’s financial statements but which has not been sold by this year-end due to the sale being referred to the Securities and Exchange Commission (SEC). SEC is not expected to report its findings until 6 months after this year-end.

Answer

i) Classification as held for sale is a non-adjusting event after the reporting period (IAS 10 para 22(c)). Therefore, the definition of a discontinued operation is not met as the assets are neither discontinued in the period nor classified as held for sale at the year-end. (2 marks)

ii) For an operation not yet sold or abandoned to meet the definition of a discontinued operation, it must meet the IFRS 5 held for sale criteria. All of these criteria were met at the previous year-end. However, at the current year-end, the operation was not sold within 12 months of classification, and the period is expected to be extended well past this. Nonetheless, where the period is extended by an event beyond the entity’s control, such as this, IFRS 5 Appendix B permits classification as held for sale (and therefore treatment as a discontinued operation) to continue, provided the other criteria are still met, which appears to be the case here. (2 marks)

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FR – May 2020 – L2 – Q2b – Classification of Discontinued Operations under IFRS 5

Assess the classification of certain operations as discontinued operations under IFRS 5 for two scenarios.

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FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

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FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

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FR – May 2020 – L2 – Q2a – Revenue Recognition under IFRS 15

Determine the appropriate accounting treatment for a sales transaction with a free two-year maintenance contract under IFRS 15.

Question

Ejura Ltd (Ejura) is a manufacturing and retail company that prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year.

In order to generate or improve sales on one of its older products, Ejura offered a promotion named ‘something for free.’ The promotion included free maintenance services for the first two years. On 1 October 2019, under the promotional offer, Ejura sold goods to a supermarket chain for GH¢4.4 million. A two-year maintenance contract would normally be sold for GH¢0.5 million, and the list price of the product would normally be GH¢5 million. The transaction has been included in revenue at GH¢4.4 million.

Required:
In accordance with IFRS 15: Revenue from Contracts with Customers, justify the appropriate accounting treatment for the above transaction in the financial statements of Ejura for the year ended 31 December 2019.

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FR – May 2020 – L2 – Q2a – Revenue Recognition under IFRS 15

Determine the appropriate accounting treatment for a sales transaction with a free two-year maintenance contract under IFRS 15.

Question

Ejura Ltd (Ejura) is a manufacturing and retail company that prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year.

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FR – May 2020 – L2 – Q3c – Statement of Changes in Equity

Prepare a statement of changes in equity for Badu Trading Ltd, including dividends, revaluation reserves, and retained profits adjustments for the year ending May 31, 2020.

Question

Prepare the following information in a form suitable for publication for Badu Trading Ltd’s financial statements for the year ended 31 May 2020.

c) Statement of changes in equity. (6 marks)

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FR – May 2020 – L2 – Q3c – Statement of Changes in Equity

Prepare a statement of changes in equity for Badu Trading Ltd, including dividends, revaluation reserves, and retained profits adjustments for the year ending May 31, 2020.

Question

Prepare the following information in a form suitable for publication for Badu Trading Ltd’s financial statements for the year ended 31 May 2020.

c) Statement of changes in equity. (6 marks)

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Required: Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Required: Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Workings – Calculation of Actuarial Gain/Loss:

Journal Entries:

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Workings – Calculation of Actuarial Gain/Loss:

Journal Entries:

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

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CR – May 2020 – Q4a – Capital Reduction Account

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Introduction:

Financial Performance:

Financial Position:

Conclusion:

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Introduction:

Financial Performance:

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).