ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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The mind is not meant to be a mere repository of facts but a tool for dreaming and thinking. They need to be
stretched. Nothing stretches a mind more than a big dream that seems to be beyond our present abilities. An
idea can turn into gold or dust depending on the courage of the person incubating it. Timidity and fear to think
and dream only leave us parked on the road to nowhere great!!!
The size of your struggles should not be your title to depression. Inside every struggling person there is a giant
that is seeking expression. Never let your situation lead you to think that there is no future or reality beyond
what you have seen or experienced. The future is too precious to be trashed by temporary difficulties!!!

Rom 8:28 And we know that all things work together for good to them that love God, to them who are
the called according to his purpose.
Instructions to candidates
Answer ALL FIVE (5) questions. Answer in terms of International Financial Reporting Standards,
revised International Accounting Standards and the Zimbabwe Companies Act (Chapter 24:03).
Tax rates quoted are not necessarily those in the current Finance Act. This is a CLOSED BOOK
examination. Cross out errors in ink-do NOT use correcting fluid. Please do NOT use highlighter
pens. Do not use your own name or that of your company in any of your answers.

Question 1 (40 marks)

ITH Ltd is a manufacturing company located in the mountainous beautiful area of Nyanga.
The financial manager has drafted the annual financial statements for the year ended 31
December 2014. Your assistance is required to finalise these annual financial statements
according to the requirements of International Financial Reporting Standards.
The profit before tax of ITH Limited for the year ended 31 December 2014 amounted to $1
406 000. The profit before tax includes the following:
$
Income
Foreign income received from France
Dividends received
Expenses
Depreciation
Traffic fines (not tax deductible)
Allowance for credit losses
Provision for warranty costs

138 000
25 000
432 000
12 000
80 000
180 000

Additional information
1. The foreign income received from France is not taxable in Zimbabwe in terms of a double
taxation agreement. ITH Ltd paid foreign taxes of $30 000 on this income.
2. Zimra allows 25% of the allowance for credit losses as a deduction. The balance on the
Allowance for credit losses account on 31 December 2013 amounted to $120 000.
3. ITH Ltd provides a 12 month warranty on all goods sold. Based on past experience the
financial manager estimated that a provision for warranty costs of 0.5% of revenue should
be provided for on an annual basis. The revenue for the year ended 31 December 2014 was
$43 000 000 (2013: $40 000 000). Actual repair costs of $165 000 were debited to the
provision account in 2014.
4. The financial manager negotiated an insurance contract that is payable annually in
advance on 1 July. The premium paid on 1 July 2014 amounted to $90 000 (1 July 2013: $80
000). Both of these amounts were correctly recorded for the financial years ending 31
December 2014 and 2013.

ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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5. Property, plant and equipment

The following information relating to property, plant and equipment
Carrying
Administration
Manufacturing
amount
buildings
equipment
$
$
31 December
1 275 000
1 549 000
2014
31 December
1 350 000
1 906 000
2013
Depreciation rate
5% on cost
20% on cost
Tax base
31 December
2014
31 December
2013
Capital allowance

was provided:
Total
$
2 824 000
3 256 000

1 500 000

1 450 000

1 950 000

1 500 000

1 880 000

3 380 000

None

25% on cost

On 31 December 2014, ITH Ltd sold equipment with a cost price of $150 000 for $85 000.
The above schedules were prepared before the sale of the equipment had taken place.
The only journal entry recorded in respect of the sale of the equipment in the accounting
records of ITH Ltd for the financial year ended 31 December 2014 was as follows:
Dr Bank
Cr Asset realisation

$85 000
$85 000

Details of the equipment sold on 31 December 2014 are as follows:

Cost: 1 January 2012
$150 000
Accumulated depreciation: 31 December 2014

$90 000

Accumulated wear and tear: 31 December 2014 $112 500

No other non-current assets were purchased or sold during the year.
6. The normal rate is 28%. An incomplete extract from the Zimra account at year end is
summarised below:
Debit
01/06/201
4
30/06/201
4
31/12/201
4

Payment 2013
assessment
Provisional
payment 2014
2nd Provisional
Payment 2014

Credit

17 500

01/01/201
4
31/01/201
4

200 000

$
Balance
2013
Current tax
expense

16 000
???

160 000

7. The company provides for deferred tax on all temporary differences according to the
comprehensive basis using the statement of financial position approach.
8. There are no other exempt or temporary differences other than those mentioned in the
given information.

ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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9. It is probable that future taxable profits will be available against which any deductible
temporary differences can be utilised.
10. The balance on the deferred tax asset account on 31 December 2013 was $62 720.
11. Assume all amounts are material.
Required
1.1 Calculate the current tax expense of ITH Ltd in the statement of profit or loss and other
comprehensive income for the year ended 31 December 2014. Start your calculation with
the adjusted profit before tax. (15)
1.2 Calculate the deferred tax balance of ITH Ltd for the year ended 31 December 2014,
using the statement of financial position approach. List all the temporary differences and
indicate next to each temporary difference if it results in a deferred tax asset or a deferred
tax liability. (15)
1.3 Prepare the income tax expense note and deferred tax note in the annual financial
statements of ITH Ltd for the year ended 31 December 2014. (10)
Your answer must comply with the requirements of International Financial Reporting
Standards.
Comparative figures are NOT required.
All calculations must be shown.
QUESTION 2 (20 marks)
Moby Estate Limited is an exclusive golf estate next to the Sabi river in Chipinge. The golf
estate consists of 200 plots, measuring 1 hectare each, a 18 hole golf course, a clubhouse
and a golfshop.
1. During the year ended 28 February 2013, 110 plots (including the 2 plots sold by HK
Estate Agents) were sold at a selling price of $125 400 each, inclusive of value added tax of
14%. The following details relate to the sale of these plots:
$
Sales received in cash
200
Sales outstanding at year end
800

13 543
250

On 25 February 2013 HK Estate Agents sold 2 plots with a total selling price of $250 800
(including 14% VAT) to Mr. Game. After Mr. Game paid for these plots on 28 March 2013, the
plots were transferred in the name of Mr. Game. The other plots sold have already been
transferred in the names of the buyers at year end on 28 February 2013.
2. The golf club consists of local residents of the golf estate and other members. The
following details relate to the golf fees for the financial year ended 28 February 2013:
$
Entrance fees received in cash for new members joining from 1 March 2013
8
000
Entrance fees received in cash for new members joining from 1 March 2012
49
000
Entrance fees of new members joining from 1 March 2012 still outstanding at year end
10 000
Membership fees for the period from 1 March 2011 to 28 February 2012 received in cash
2 000
Membership fees for the period from 1 March 2012 to 28 February 2013 received in cash
25 000

ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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Membership fees for the period from 1 March 2012 to 28 February 2013 still outstanding
at year end
5 000
3. The golfshop at the golf estate sells golfclubs on a consignment basis through a network
of agents. All consignment sales are made at a gross profit of 20% on selling price. The
following details relate to these golfclubs:
$
Golfclubs at cost delivered on consignment to agents during the current year
45
000
Golfclubs on consignment unsold at cost - 28 February 2013
14
000
4. On 15 January 2013 a customer, How Limited placed an order for 50 golfshirts at the
golfshop for a golfday they are sponsoring during Easter. On the same day How Limited paid
an amount of $5 000 as final settlement on placement of the order. The golfshop placed an
order for these golfshirts at their supplier on 17 January 2013, but the supplier will deliver
the ordered golfshirts directly to How Limited on 3 March 2013.
5. On 1 November 2012 the golfshop of Moby Estate Limited sold a set of golfclubs with a
cash selling price of $7 500 to Mr. JHT. Mr. JHT is an article clerk and negotiated the following
payment terms with the golfshop of Moby Estate Limited:
Deposit paid in cash on 1 November 2012
12 Instalments payable monthly in arrears
$628,50
Nominal interest rate
14% p.a.

$500,00

The following is the repayment schedule, which you must assume to be correct:
Date
Instalment
outstanding
$

Capital
$

30/11/2012
31/12/2012
31/01/2013
28/02/2013
31/03/2013
30/04/2013
31/05/2013
30/06/2013
31/07/2013
31/08/2013
30/09/2013
31/10/2013

546,83
553,21
559,67
566,20
572,80
579,49
586,25
593,09
600,00
607,00
614,09
621,37

81,67
75,29
68,83
62,30
55,70
49,01
42,25
35,41
28,50
21,50
14,41
7,13
542,00

628,50
628,50
628,50
628,50
628,50
628,50
628,50
628,50
628,50
628,50
628,50
628,50

Interest

Balance
$
7 000
6 453,17
5 899,96
5 340,29
4 774,09
4 201,29
3 621,80
3 035,55
2 442,46
1 842,46
1 235,46
621,37
-

REQUIRED:
Please list points (1) to (5) above in your answer and in each of the above cases:
(a) Calculate the amount that should be recognised as revenue in the statement of profit or
loss of Moby Limited for the year ended 28 February 2013 and
(b) Give the reasons why this amount is included or excluded as revenue for the year ended
28 February 2013, according to the requirements of Generally Accepted Accounting Practice.
QUESTION (20 marks)

ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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Zulu Ltd is a manufacturer of electronic surveillance equipment. The company is situated in

the Eastern Highlands. Zulu Ltd acquired its manufacturing premises on 2 January 2012 for
$1 200 000 (land: $200 000, buildings: $1 000 000). A residual value of $200 000 was
allocated to the building and it is depreciated over 20 years on the straight-line basis.
Zulu Ltd applies the revaluation model to land and buildings. The buildings will be revalued
for the first time in 2015. The fair value of the property was $1 500 000 (land $300 000,
building $1 200 000) on 1 October 2014. Accumulated depreciation is eliminated on
revaluation. The revaluation surplus is realised when the asset is sold or derecognised.
The fair values were determined by Miss Flo, an independent sworn appraiser with a
recognised and relevant professional qualification, who has recent experience in the location
and category of the property being valued. The fair values were determined with reference
to current market evidence.
During the current year it became necessary to replace the manufacturing machine used in
the manufacturing process. The new machine had a current market price of $1 500 000, but
due to limited cash resources Zulu Ltd decided to acquire the machine in terms of a lease
agreement commencing on 1 April 2014.
The terms of the lease are as follows:
Lease period
Instalment
Instalments to be made
First payment to be made
Last payment to be made
Nominal interest rate
Effective interest rate

3 years
$305 044
Every 6 months
30 September 2014
31 March 2017
12%
11.26%

Ownership of the machine will be transferred to the lessee at the end of the lease period at
no additional cost. Legal fees of $15 000 were paid by Zulu Ltd to How Legal Services for
finalising the lease contract.
Zulu Ltd applies the cost model to manufacturing machines and depreciates them over 5
years on the straight line basis.
Required
Disclose the above information in the notes to the annual financial statements of Zulu Ltd
for the year ended 30 September 2015.
The following notes are NOT required:
- Accounting policies
- Deferred tax
- Income tax expense, and
- Currency risk, interest rate risk and liquidity risk.
Your answer should comply with the requirements of International Financial Reporting
Standards.
Comparative figures are NOT required.
The total column of the Property, plant and equipment note is NOT required.
All calculations must be shown.
QUESTION 4 (10 marks)
a) Cockroach Ltd is a listed company that manufactures several types of weed killers and insecticides.
You have just been appointed as the companys financial accountant, and it is your responsibility to
finalise the financial statements for the year ended 28 February 2011. The directors want to approve the

ADVANCED ACCOUNTING AND FINANCIAL REPORTING EXAM 2

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statements for issue on 20 April 2011. The following matters should still be considered, as the previous
accountant was not certain how they should be accounted for:
Bugs XP
This is a very specialised insecticide which kills fruit beetles. On 25 March 2011 a competitor however
introduced an improved product to the market, with the result that the demand for Bugs XP declined. The
selling price was therefore reduced immediately from $700 per five litre drum to $400 per drum, which
resulted in a material loss of revenue for Cockroach Ltd. On 28 February 2011, 1 000 drums of the
insecticide were on hand. The previous accountant was not certain whether this inventory should be
written down to the selling price of $400 per drum, as it is lower than the cost of $550 per drum.
REQUIRED
Explain how the matter above should be dealt with in the financial statements for the year ended 28
February 2011. Give reasons for your answer. (6 marks)
b) Distinguish between a finance lease and an operating lease. (4)
QUESTION 5 (10marks)
IM Ltd have a fixed price contract to build a tower block. The initial amount of revenue
agreed is $220m. At the beginning of the contract on 1 January 20X6 our initial estimate of
the contract costs is $200m. At the end of 20X6 our estimate of the total costs has risen to
$202m.
During 20X7 the customer agrees to a variation which increases expected revenue from the
contract by
$5m and causes additional costs of $3m. At the end of 20X7 there are materials stored on
site for use during the following period which cost $2.5m.
We have decided to determine the stage of completion of the contract by calculating the
proportion that contract costs incurred for work to date bear to the latest estimated total
contract costs. The contract costs incurred at the end of each year were 20X6: $52.52m,
20X7: $154.2m (including materials in store),
20X8 $205m.
Required
Calculate the stage of completion for each year of the contract and show how revenues,
costs and profits will be recognised in each year.
Spiritual corner
There is no new enemy or new demon in our lives. The demons or evil situations we are struggling with have
long since challenged or troubled the first founding members of our bloodline. The Haman which troubled the
Jews is the descendant of Agag, the first King to be killed by Prophet Samuel when the first king of Israel spared
him (1 Sam15). Thus Haman was fighting back what was done to his ancestor by Samuel. It is therefore
important that you cut any spiritual umbilical cord that links you to evil generational tendencies like what
Abram did. When Abram was called by God he built his first alter to disconnect from evil generational
tendencies of his bloodline.

Gen 12:7 And the LORD appeared unto Abram, and said, Unto thy seed will I give this land: and there
builded he an altar unto the LORD, who appeared unto him
Yours truly
Rev