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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Tags: Foreign Exchange, Investment properties, Monetary and non-monetary transactions, Revenue Recognition
Level: Level 3

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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Topic: Foreign currency
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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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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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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Level: Level 3

Topic: IAS 20 and IAS 40)
Series: MAY 2020

Tags: Capital Commitment, Deferred Income, Factory Construction, Government Grants, IAS 20
Level: Level 3

Topic: IAS 20 and IAS 40)
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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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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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

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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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Level: Level 3

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Series: MAY 2020

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Series: MAY 2020

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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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PT – May 2020 – L2 – Q3b – Scope and computation of income tax for individuals and partnerships.

Characteristics of a contract of service from a taxation perspective.

Question

b) It is necessary to find out whether an activity carried out by an individual amounts to a profession (contract for service) or employment (contract of service). From a taxation point of view, there is the existence of employment where there is a contract of service.

Required:
What are the characteristics of a contract of service?
(6 marks)

Answer

Characteristics of a contract of service:

Control by the employer: The worker is controlled by their employer. They must perform the tasks they are instructed to by a line manager according to their job description. In a contract of service, the employer normally enjoys the power of control over the work of the servant and the servant is bound to obey the orders/instructions of the master. The matter of control by the employer over the employee has been emphasized by the Courts as being the important factor in deciding whether the relationship of employer and employee exists.
Specific working hours and location: The worker is expected to work at a specific place during specific hours on specific days. For contract for service (i.e. an independent contractor), on the other hand, undertakes to produce the required result, but in the actual execution of the job to produce the result, he is not under the order or control of the person for whom he executes that work. He is free to use his discretion. Do note that a contract of service only comes into effect when the employee turns up for work on the appointed starting date, as stipulated in the agreed terms of the contract.
Formal employment contract: A contract of service has a formal contract which defines the employer-employee relationship, including the terms and conditions of employment. The contract must include certain terms and essential clauses, such as hours of work and job scope. The agreement can be in writing, verbal, expressed or implied. It can be in the form of a letter of appointment or employment, or an apprenticeship agreement. However, to minimize disputes on the agreed terms and conditions, the contract should be in writing.
Statutory rights: Employees have statutory rights regarding how they can be asked to leave their employment. Employees have statutory rights to holiday pay, sick pay, maternity and paternity rights, and redundancy payments.
Economic considerations: Is the business carried out on the person’s own account, or is it for the employer? If it is for the employer, then there is a contract of service. Can the person share in profit or be liable to any risk of loss? If the person cannot share in the profits and risks of running the business, then there is contract of service. Where liability for any errors or defects in work completed for clients, is borne by the employee, and this may expand to personal liability (assuming the contractor is a director), then there is contract for service.

Termination clauses:

In a contract of service, there will be typically a clause that provides for situations where either the employer or employee can terminate the contract, and the applicable procedures for the termination of the contract. A contract of service may be terminated if the employee decides to resign, the employer dismisses the employee, or the contract terms have expired. A contract for service may be terminated if the performance of the service provider is not satisfactory, or if the performance of the project or service is disrupted due to unforeseen circumstances, or it becomes impossible to continue on a project that is already in progress.
In a contract of service, there will be typically a clause that provides for situations where either the employer or employee can terminate the contract, and the applicable procedures for the termination of the contract. A contract of service may be terminated if the employee decides to resign, the employer dismisses the employee, or the contract terms have expired. A contract for service may be terminated if the performance of the service provider is not satisfactory, or if the performance of the project or service is disrupted due to unforeseen circumstances, or it becomes impossible to continue on a project that is already in progress.
An individual’s employment status will affect their entitlement to certain social welfare benefits (e.g. social security contribution by employees, workers’ pension fund, old-age contributory pension and disability benefit, marriage responsibility allowance, child education benefits, etc.).

(Any 4 points @ 1.5 marks each = 6 marks)

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PT – May 2020 – L2 – Q3b – Scope and computation of income tax for individuals and partnerships.

Characteristics of a contract of service from a taxation perspective.

Question

Required:
What are the characteristics of a contract of service?
(6 marks)

Answer

Characteristics of a contract of service:

Control by the employer: The worker is controlled by their employer. They must perform the tasks they are instructed to by a line manager according to their job description. In a contract of service, the employer normally enjoys the power of control over the work of the servant and the servant is bound to obey the orders/instructions of the master. The matter of control by the employer over the employee has been emphasized by the Courts as being the important factor in deciding whether the relationship of employer and employee exists.
Specific working hours and location: The worker is expected to work at a specific place during specific hours on specific days. For contract for service (i.e. an independent contractor), on the other hand, undertakes to produce the required result, but in the actual execution of the job to produce the result, he is not under the order or control of the person for whom he executes that work. He is free to use his discretion. Do note that a contract of service only comes into effect when the employee turns up for work on the appointed starting date, as stipulated in the agreed terms of the contract.
Formal employment contract: A contract of service has a formal contract which defines the employer-employee relationship, including the terms and conditions of employment. The contract must include certain terms and essential clauses, such as hours of work and job scope. The agreement can be in writing, verbal, expressed or implied. It can be in the form of a letter of appointment or employment, or an apprenticeship agreement. However, to minimize disputes on the agreed terms and conditions, the contract should be in writing.
Statutory rights: Employees have statutory rights regarding how they can be asked to leave their employment. Employees have statutory rights to holiday pay, sick pay, maternity and paternity rights, and redundancy payments.
Economic considerations: Is the business carried out on the person’s own account, or is it for the employer? If it is for the employer, then there is a contract of service. Can the person share in profit or be liable to any risk of loss? If the person cannot share in the profits and risks of running the business, then there is contract of service. Where liability for any errors or defects in work completed for clients, is borne by the employee, and this may expand to personal liability (assuming the contractor is a director), then there is contract for service.

Termination clauses:

In a contract of service, there will be typically a clause that provides for situations where either the employer or employee can terminate the contract, and the applicable procedures for the termination of the contract. A contract of service may be terminated if the employee decides to resign, the employer dismisses the employee, or the contract terms have expired. A contract for service may be terminated if the performance of the service provider is not satisfactory, or if the performance of the project or service is disrupted due to unforeseen circumstances, or it becomes impossible to continue on a project that is already in progress.
In a contract of service, there will be typically a clause that provides for situations where either the employer or employee can terminate the contract, and the applicable procedures for the termination of the contract. A contract of service may be terminated if the employee decides to resign, the employer dismisses the employee, or the contract terms have expired. A contract for service may be terminated if the performance of the service provider is not satisfactory, or if the performance of the project or service is disrupted due to unforeseen circumstances, or it becomes impossible to continue on a project that is already in progress.
An individual’s employment status will affect their entitlement to certain social welfare benefits (e.g. social security contribution by employees, workers’ pension fund, old-age contributory pension and disability benefit, marriage responsibility allowance, child education benefits, etc.).

(Any 4 points @ 1.5 marks each = 6 marks)

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Topic: Income Tax Liabilities
Series: MAY 2020

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PT – May 2020 – L2 – Q3a – Scope and computation of income tax for partnerships

Assessable income computation for partners in a partnership business.

Question

a) During the year ended 31 December 2018, the partnership of David, Stella, and Percy reported an adjusted profit of GH¢951,000 before charging partners’ salaries, interest on capital, and cost of traveling for leave.

David Stella Percy
Profit/loss sharing ratio 3 2 1
Salaries GH¢48,000 GH¢72,000 GH¢96,000
Interest on Capital GH¢30,000 GH¢20,000 GH¢10,000
Cost of traveling for leave GH¢20,000 GH¢30,000 GH¢25,000
Required:
Compute the assessable income for each partner.
(7 marks)

Answer

a) David, Stella and Percy
Share of appropriation of profit for partnership year 2018
Partnership Computed Income

(In accordance with section 52(7) of the Income Tax Act (Act 896), benefits paid to
partners are added back)
(7 marks evenly spread using ticks)

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Tags: Assessable Income, Income Tax, Partnerships, Profit Sharing
Level: Level 2

Topic: Income Tax Liabilities
Series: MAY 2020

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Topic: Income Tax Liabilities
Series: MAY 2020

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PT – May 2020 – L2 – Q3a – Scope and computation of income tax for partnerships

Assessable income computation for partners in a partnership business.

Question

Answer

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Topic: Income Tax Liabilities
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PT – May 2020 – L2 – Q4a – Capital Allowance and tax reliefs

Computation of capital allowance for Stella-VD Ltd for the 2017 and 2018 years of assessment.

Question

Stella-VD Company Limited, manufacturers of fruit juice for local consumption, commenced business on 1/10/2017, with an accounting year-end at 31 December. The company submitted its accounts for 2017 and was assessed accordingly. The company submitted its tax returns for the 2018 year of assessment to the Ghana Revenue Authority on 30/04/2019. Below are the details:

iii) Staff Welfare

Staff Medical Bills: 3,700
Safety Wear for Staff: 10,500
Canteen Equipment purchased on 30/11/2018: 12,000
iv) Donation and Subscription

Goods given as Gratis to Customs Officials: 13,000
Donation of Goods to SOS Children Village: 10,000
Subscription to Association of Ghana Industries: 5,000
v) Wages and Salaries

Old Staff: 120,000
Fresh Graduates employed by Stella-VD Ltd: 26,000
Fresh Graduates constitute 0.9% of the total workforce
vi) Other Income

Compensation from a Customer for Cancellation of Sale Order: 8,000
Compensation for Loss of Trading Stock of the Company: 10,000
Compensation for Cancellation of Purchase Order by Supplier: 5,000
The Company’s assets include the following:

Type of Assets Date of Acquisition Cost (GH¢)
Factory Building 01/10/2017 300,000
Plant and Machinery 25/10/2017 171,000
Delivery Van 01/11/2017 50,000
Computers 01/10/2017 40,000
Furniture and Fittings 10/12/2017 150,000
Other Office Equipment 01/10/2017 200,000
Office Building 30/06/2018 500,000
Required:
a) Compute the appropriate capital allowance for the 2017 and 2018 years of assessment.
(8 marks)

Answer

a) Computation of capital allowance for 2017 and 2018

(8 marks evenly spread using ticks)

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Topic: Capital allowance, Corporate Tax Liabilities
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Level: Level 2

Topic: Capital allowance, Corporate Tax Liabilities
Series: MAY 2020

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PT – May 2020 – L2 – Q4a – Capital Allowance and tax reliefs

Computation of capital allowance for Stella-VD Ltd for the 2017 and 2018 years of assessment.

Question

Staff Medical Bills: 3,700
Safety Wear for Staff: 10,500
Canteen Equipment purchased on 30/11/2018: 12,000
iv) Donation and Subscription

Goods given as Gratis to Customs Officials: 13,000
Donation of Goods to SOS Children Village: 10,000
Subscription to Association of Ghana Industries: 5,000
v) Wages and Salaries

Old Staff: 120,000
Fresh Graduates employed by Stella-VD Ltd: 26,000
Fresh Graduates constitute 0.9% of the total workforce
vi) Other Income

Answer

a) Computation of capital allowance for 2017 and 2018

(8 marks evenly spread using ticks)

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Level: Level 2

Topic: Capital allowance, Corporate Tax Liabilities
Series: MAY 2020

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PT – May 2020 – L2 – Q2e – Corporate Tax Liabilities

Determines the tax treatment for dividends received by a resident company holding significant voting power in another resident company.

Question

Zealow Ltd, a car battery dealer, holds 26% voting power of Aboye Ltd, an energy and power distribution company. Both companies are resident in Ghana. Aboye Ltd declared a dividend, and the portion of the dividend that should be credited to the accounts of Zealow Ltd is GH¢78,900.

Required:
Determine the taxes payable, if any, and comment on the treatment of dividend to Zealow Ltd.
(5 marks)

Answer

Under section 59(3) of the Income Tax Act 2015 (Act 896), a dividend paid to a resident company by another resident company is exempt from tax where the recipient company controls, directly or indirectly, at least 25% of the voting power of the company that paid the dividend.

Since Zealow Ltd holds 26% voting power in Aboye Ltd, the dividend of GH¢78,900 credited to the accounts of Zealow Ltd is exempt from tax. The dividend is not taxable in the hands of either Zealow Ltd or Aboye Ltd.

(5 marks)

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PT – May 2020 – L2 – Q2e – Corporate Tax Liabilities

Determines the tax treatment for dividends received by a resident company holding significant voting power in another resident company.

Question

Required:
Determine the taxes payable, if any, and comment on the treatment of dividend to Zealow Ltd.
(5 marks)

Answer

(5 marks)

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Level: Level 2

Topic: Corporate Tax Liabilities
Series: MAY 2020

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PT – May 2020 – L2 – Q2d – Value-Added Tax (VAT)

Discusses the conditions under which a small business can apply for VAT registration without meeting the threshold requirements.

Question

Abah Enterprise is a small business but intends to bid for government contracts. It has a very small cash flow, with turnover unable to be registered under the compulsory registration arrangement for Value Added Tax. The proprietor of Abah Enterprise feels that if the enterprise is not registered for Value Added Tax, it will be difficult to be able to bid for government contracts.

Required:
Under what condition can Abah Enterprise apply to Ghana Revenue Authority for Value Added Tax Registration without meeting the threshold registration requirements under section 6 of the Value Added Tax Act 2013 (Act 870)?
(5 marks)

Answer

Abah Enterprise can apply for VAT registration without meeting the threshold if the following conditions are met:

Fixed Place of Abode or Business: The business must have a permanent and identifiable place of operation.

Reasonable Grounds for Belief: There should be reasonable grounds to believe that the business may soon meet the VAT registration threshold.

Proper Accounting Records: The business must maintain proper accounting records related to its operations.

Regular and Reliable Tax Returns: The business must submit regular and reliable tax returns as required by the Ghana Revenue Authority.

Fit and Proper Person: The proprietor must be deemed a fit and proper person to be registered for VAT.

(5 points @ 1 mark each = 5 marks)

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Level: Level 2

Topic: Value-Added Tax (VAT), Customs, and Excise Duties
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PT – May 2020 – L2 – Q2d – Value-Added Tax (VAT)

Discusses the conditions under which a small business can apply for VAT registration without meeting the threshold requirements.

Question

Answer

Abah Enterprise can apply for VAT registration without meeting the threshold if the following conditions are met:

Fixed Place of Abode or Business: The business must have a permanent and identifiable place of operation.

Reasonable Grounds for Belief: There should be reasonable grounds to believe that the business may soon meet the VAT registration threshold.

Proper Accounting Records: The business must maintain proper accounting records related to its operations.

Regular and Reliable Tax Returns: The business must submit regular and reliable tax returns as required by the Ghana Revenue Authority.

Fit and Proper Person: The proprietor must be deemed a fit and proper person to be registered for VAT.

(5 points @ 1 mark each = 5 marks)

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Level: Level 2

Topic: Value-Added Tax (VAT), Customs, and Excise Duties
Series: MAY 2020

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PT – May 2020 – L2 – Q2c – Value-Added Tax (VAT),

Explains the purpose of implementing Withholding VAT in Ghana.

Question

The introduction of Withholding Value Added Tax was widely celebrated by tax administrators and tax practitioners as it is believed the benefits to be raked by the Ghana Revenue Authority would be enormous.

Required:
What purpose does Withholding Value Added Tax seek to achieve?
(2 marks)

Answer

Withholding VAT is not a new tax but a compliance measure aimed at ensuring that all VAT due to the government is paid. It involves the declaration of VAT by both the supplier and the withholding agent. The primary purpose is to curb the abuse by non-filers of VAT who charge VAT without accounting for it to the authorities.
(2 marks)

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Topic: Withholding Tax Administration
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Level: Level 2

Topic: Withholding Tax Administration
Series: MAY 2020

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PT – May 2020 – L2 – Q2c – Value-Added Tax (VAT),

Explains the purpose of implementing Withholding VAT in Ghana.

Question

Required:
What purpose does Withholding Value Added Tax seek to achieve?
(2 marks)

Answer

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Topic: Withholding Tax Administration
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PT – May 2020 – L2 – Q2a – Value-Added Tax (VAT),

Examines the VAT implications for a non-resident company's purchase and servicing of vehicles in Ghana.

Question

Pamela Noi Ltd is a non-resident person. The Company’s Procurement Officer came down to Ghana to buy Ten (10) Toyota Vehicles manufactured by Safo Kantanka to be delivered in Mali. The vehicles are going to be used in Mali. The management of Pamela Noi Ltd requested that the vehicles be serviced in Ghana by High Class Mechanic, a popular mechanic in Accra-Ghana.

Required:

i) What is the Value Added Tax (VAT) implication on the vehicle to be acquired by Pamela Noi Ltd?
(2.5 marks)

ii) What is the VAT implication of the servicing of the vehicle in Ghana?
(2.5 marks)

Answer

i) VAT Implication on Vehicle Purchase:
VAT is charged on goods, services, and imports under the destination principle. Since the 10 vehicles purchased by Pamela Noi Ltd are to be used in Mali (outside Ghana), the purchase does not attract VAT in Ghana.

ii) VAT Implication on Vehicle Servicing:
VAT is charged when services are consumed in Ghana. Since the vehicles will be serviced in Ghana by a Ghanaian mechanic, this service is a taxable activity and will attract VAT under the destination principle.

(5 marks evenly spread using ticks)

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Topic: and Excise Duties, Value-Added Tax (VAT)
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Level: Level 2

Topic: and Excise Duties, Value-Added Tax (VAT)
Series: MAY 2020

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PT – May 2020 – L2 – Q2a – Value-Added Tax (VAT),

Examines the VAT implications for a non-resident company's purchase and servicing of vehicles in Ghana.

Question

Required:

i) What is the Value Added Tax (VAT) implication on the vehicle to be acquired by Pamela Noi Ltd?
(2.5 marks)

ii) What is the VAT implication of the servicing of the vehicle in Ghana?
(2.5 marks)

Answer

(5 marks evenly spread using ticks)

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Level: Level 2

Topic: and Excise Duties, Value-Added Tax (VAT)
Series: MAY 2020

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PT – May 2020 – L2 – Q1b – Public Finance

Describes five causes of deficit financing in a government budget.

Question

The government budget is a plan of government revenues and expenditures for a specified period, usually a year. When budgeted expenditures exceed projected tax revenues, the budget is projected to be in deficit. This will lead to deficit financing.

Required:
Describe briefly FIVE (5) causes of deficit financing.
(5 marks)

Answer

Causes of Deficit Financing:

During a Period of Depression: Deficit financing becomes important during major depressions or when traditional monetary policies fail, stimulating economic stability.
During Wars: Governments may resort to deficit financing to raise resources for tribal or other conflicts, despite potential inflationary effects.
During a Process of Economic Development: In developing countries, deficit financing helps overcome low investment rates to achieve rapid development.
Ineffective Financial Management: Poor budgetary projections and management lead to demand for loans, grants, and aid to finance ineffective programs.
Weak Expenditure Control and Monitoring: Arrears in annual accounts and unpredictable economic environments often lead to unplanned expenditures, requiring deficit financing.

(5 points @ 1 mark each = 5 marks)

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Topic: Overview of the Ghanaian Tax System and Fiscal Policy
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PT – May 2020 – L2 – Q1b – Public Finance

Describes five causes of deficit financing in a government budget.

Question

Required:
Describe briefly FIVE (5) causes of deficit financing.
(5 marks)

Answer

Causes of Deficit Financing:

During a Period of Depression: Deficit financing becomes important during major depressions or when traditional monetary policies fail, stimulating economic stability.
During Wars: Governments may resort to deficit financing to raise resources for tribal or other conflicts, despite potential inflationary effects.
During a Process of Economic Development: In developing countries, deficit financing helps overcome low investment rates to achieve rapid development.
Ineffective Financial Management: Poor budgetary projections and management lead to demand for loans, grants, and aid to finance ineffective programs.
Weak Expenditure Control and Monitoring: Arrears in annual accounts and unpredictable economic environments often lead to unplanned expenditures, requiring deficit financing.

(5 points @ 1 mark each = 5 marks)

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PT – May 2020 – L2 – Q1d – Tax Administration

Defines what constitutes a tax return.

Question

What constitutes a Tax Return?
(2 marks)

Answer

A tax return is an official statement that contains the income of the person and any allowable deduction for any year of assessment from employment, business, and/or investment. It is statutory.
(2 marks)

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Topic: Tax Administration
Series: MAY 2020

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PT – May 2020 – L2 – Q1d – Tax Administration

Defines what constitutes a tax return.

Question

What constitutes a Tax Return?
(2 marks)

Answer

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PT – May 2020 – L2 – Q1a – Income Tax Liabilities

Explains the structural classification of the Ghanaian tax system.

Question

Taxation system can be classified in many ways. It could be based on the method used in the computation of the tax or based on the incidence/responsibility for the payment of the tax.

Required:
Explain the structural or classification of the Ghanaian tax system.
(5 marks)

Answer

Structural and classification of taxes in Ghana:
Based on the method used for the calculation of the tax

Proportional Tax: Tax levied at a fixed rate on the amount of income earned. E.g., a household earning GH¢10,000 and another earning GH¢10 million will both pay 10% of their income as tax.
Progressive Tax: Tax rate increases with the amount of income. E.g., a household earning GH¢10,000 may pay 5%, while one earning GH¢10 million may pay 35%.
Regressive Tax: Tax rate decreases as income increases. Typically seen in excise taxes.Based on who has the responsibility to pay the tax
Direct Tax: The impact and incidence of tax fall on the same person, such as personal income tax, company tax, etc.
Indirect Tax: The impact and incidence of tax fall on different people, such as VAT, excise tax, etc.

(5 marks evenly spread using ticks)

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PT – May 2020 – L2 – Q1a – Income Tax Liabilities

Explains the structural classification of the Ghanaian tax system.

Question

Taxation system can be classified in many ways. It could be based on the method used in the computation of the tax or based on the incidence/responsibility for the payment of the tax.

Required:
Explain the structural or classification of the Ghanaian tax system.
(5 marks)

Answer

Structural and classification of taxes in Ghana:
Based on the method used for the calculation of the tax

Proportional Tax: Tax levied at a fixed rate on the amount of income earned. E.g., a household earning GH¢10,000 and another earning GH¢10 million will both pay 10% of their income as tax.
Progressive Tax: Tax rate increases with the amount of income. E.g., a household earning GH¢10,000 may pay 5%, while one earning GH¢10 million may pay 35%.
Regressive Tax: Tax rate decreases as income increases. Typically seen in excise taxes.Based on who has the responsibility to pay the tax
Direct Tax: The impact and incidence of tax fall on the same person, such as personal income tax, company tax, etc.
Indirect Tax: The impact and incidence of tax fall on different people, such as VAT, excise tax, etc.

(5 marks evenly spread using ticks)

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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(ii) – Ethical Actions in Contract Bidding

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

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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 – 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 – 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

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

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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 – 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).