CHARTERED ACCOUNTANTS EXAMINATIONS

_________________________
LICENTIATE LEVEL
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L1: FINANCIAL REPORTING
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MONDAY 14 DECEMBER 2015
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TOTAL MARKS 100; TIME ALLOWED: THREE (3) HOURS
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INSTRUCTIONS TO CANDIDATES
1.

You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2.

This paper is divided into TWO sections:

Section A:
Section B:

Two (2) Compulsory Questions.

Three (3) Optional Questions. Attempt any Two (2) questions.

3.

Enter your student number and your National Registration Card number on the front of
the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

Cell Phones are NOT allowed in the Examination Room.

6.

The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7.

All workings must be done in the answer booklet.

8.

Present legible and tidy work.

9.

Graph paper (if required) is provided at the end of the answer booklet.

SECTION A
There are two (2) compulsory question in this Section.
Attempt both questions.
QUESTION ONE
Hillbase purchased 22.5 million shares of Stillbase and 6 million shares of Assbase on 1st April
2014. Details of the purchase consideration given at the date of purchase are:

Investment in Stillbase
A share exchange of 2 shares in Hillbase for every 3 shares in Stillbase plus an issue to the
shareholders of Stillbase of 10% loan notes on the basis of K80 loan note for every 300 shares
held in Stillbase. The loan is redeemable at par on 30thJune 2016. Interest expense for the
period to 30th September 2014 has been included in the financial statements of Hillbase.

Investment in Assbase
A share exchange of 3 shares in Hillbase for every 4 shares in Assbase plus K1 per share
acquired in cash. The market price of Hillbases shares at 1stApril 2014 was K6 per share.
The summarized statements of profit or loss for the three companies for the year to
30thSeptember 2014 are:
Hillbase

Stillbase

Assbase

K million

K million

K million

225.00

122.10

93.00

(142.20)

(59.10)

(45.90)

82.80

63.00

47.10

(31.44)

(27.00)

(29.10)

Operating profit

51.36

36.00

18.00

Interest expense

(0.51)

Profit before tax

50.85

36.00

18.00

(14.40)

(9.00)

(6.00)

36.45

27.00

12.00

Revenue
Cost of sales
Gross profit
Operating expenses

Income tax expense

Profit for the year

The following additional information is relevant:

(i)

The details of each companys share capital and reserves at 1 October 2013 are:
Hillbase
Kmillion
60.00
15.00
54.00

Equity shares of K1 each

Share premium
Retained earnings
(ii)

Stillbase
Kmillion
30.00
12.00
22.50

Assbase
Kmillion
15.00
6.00
18.00

A fair value exercise was carried out for Stillbase at the date of acquisition which
revealed that its land had a carrying amount less than its fair value by K9 million while
its plant had a fair value more than its carrying amount by K15 million.
The increase in fair value of plant would create additional depreciation of K1.5 million in
the post-acquisition period in the consolidated financial statements to 30th September
2014.
The fair values have not yet been reflected in Stillbases financial statements.
Depreciation of plant is charged to cost of sales.

(iii)

Prior to its acquisition, Stillbase had been a good customer of Hillbase. In the postacquisition period, Hillbase sold goods to Stillbase amounting to K30 million. Hillbase
made a profit of K12 million on these sales. Half of these goods were still in the
inventory of Stillbase at 30th September 2014.

(iv)

An impairment test on the Goodwill of Stillbase conducted on 30th September 2014

concluded that it should be written down by K2.25 million. The value of the investment
in Assbase was not impaired.

(v)

Hillbase paid a dividend of K20 million on 20th September 2014. Stillbase and Assbase
did not make any dividend payments.

(vi)

It is group policy to value non- controlling interest at acquisition at its fair value which
directors determined to be K29 million.

(vii)

All items in the above statements of profit or loss are deemed to accrue evenly over the
year.

Required:
(a)

Calculate the Goodwill arising on purchase of shares in Stillbase and the carrying value
of Assbase at 1st April 2014.
(10 marks)

(b)

Prepare a consolidated statement of profit or loss for Hillbase Group for the year to 30th
September 2014.
(18 marks)

(c)

Show the movement on the consolidated retained earnings attributable to Hillbase for
the year to 30th September 2014.
(2 marks)
[Total: 30 marks]

QUESTION TWO
The following is a draft statement of financial position of Nanado Limited as at 31st August
2014.
Kmillion

Assets
Non-current
Property, plant and equipment (i)
Other investment (vi)
Development costs (iv)

600.00
150.00
25.00
775.00

Current
Inventory
Trade receivables (vii)
Bank

45.00
50.00
14.00
109.00
884.00

Total assets
Equity and liabilities
Equity
Equity shares @ K0.50 each
Retained earnings:
At 31st August 2013
For the year to 31st August 2014
Total equity
Liabilities
Non-current
Deferred tax (viii)
Loans (v)
Obligations under finance (ii)
Current
Trade payables
Obligations under finance lease (ii)
Other payables
Total liabilities
Total equity and liabilities

200.00
100.00
250.00
550.00
61.50
200.00
23.20
30.80
8.80
9.70
334.00
884.00

The following information should be considered in redrafting the above statement of

financial position.
i.

The property, plant and equipment shown in the statement of financial position is
analysed as follows:

Cost

Buildings (iii)
Furniture & fittings
Motor vehicles
Leased plant (ii)
Computes & other equip.

Kmillion

Accumulated
Depreciation
Kmillion

Net Book
Value
Kmillion

426.25

85.25

341.00

60.00

15.00

45.00

200.00

50.00

150.00

40.00

8.00

32.00

50.00
776.25

18.00
176.25

32.00
600.00

These assets are depreciated as follows:

Asset
Buildings
Furniture & fittings
Motor vehicles
Leased plant
Computes & other equipment

Rate
2%
25%
25%
see note (ii)
20%

Method
Straight line
Straight line
Straight line
Reducing balance

The depreciation charge for the year ending 31st August 2014 is yet to be accounted for
except on leased plant.
ii.

Nanado Limited leased an item of plant from Lenado for a period of two (2) years on 1st
September 2013 at annual rental payment of K12 million payable in arrears. The plant
had an economic useful life of five (5) years on 1st September 2013. The plant had a
cash price of K40 million which was equal to its fair value as at that date. The annual
interest rate implicit in the lease agreement was 10%.
The leased plant has been accounted for in the financial statements of Nanado as
though it were acquired under a finance lease agreement. It has been depreciated over
a period of five years based on its fair value.
The lease rental for the year to 31st August 2014 has been duly paid.

iii.

The directors of Nanado limited revalued the buildings for the first time to K360 million
on 31st August 2014. The resultant revaluation surplus has not been accounted for in the
financial statements of Nanado Limited.

iv.

The amount represents the cost incurred by the company in May 2014 to conduct a
market research for its new product Goodies whose development will commence in
2015.

v.

This relates to a five year loan borrowed by Nanado Limited on 1st September 2013 of
K200 million. The loan has an annual interest rate of 10%. Interest is payable on 31st
August every year starting on 31st August 2014. However, interest for the year to 31st
August 2014 was paid on 30th September 2014.
The interest has not been accounted for in the financial statements for the year to 31st
August 2014.

vi.

This was acquired at a cost of K150 million on 1st June 2014. It has a fair value of K168
million at 31st August 2014. It is however, recorded in Nanados financial statements at
its purchase cost instead of at its fair value.

vii.

Nanado Limited sold goods on behalf of Peedo Enterprises for K10 million on credit.
Nanado Limited was entitled to a commission of 10% of the sales value. The sales
amount was included in the sales and trade receivables figures in the financial
statements for the year to 31st August 2014.
The commission, which is yet to be paid by Peedo Enterprises, has not been accounted
for in the financial statements of Nanado Limited for the year ended 31st August 2014.

viii.

The tax amount of K22 million has been taken into account in arriving at the profit for
the year to 31st August 2014. This amount represents an over provision of income tax
for the year to 31st August 2013. The income tax for the year to 31st August 2014 has
been estimated at K73 million.
The deferred tax liability shown above represents the balance as at 31st August 2013.
The taxable temporary differences for the year to 31st August 2014 are equal to K50
million. This amount includes revaluation surplus relating to note (iii) above and the
balance relating to profit or loss items. The income tax rate applicable to Nanado
Limited is 35%.

ix.

The company paid dividends of 30 ngwee per share on 1st August 2014. These have
been accounted for correctly in the financial statements of Nanado Limited for the year
to 31st August 2014.
Required:
(a)

Recalculate the profit or loss of Nanado Limited for the year ending 31st August
2014.
(14 marks)

(b)

Redraft the statement of financial position of Nanado Limited as at 31st August

2014.
(15 marks)
[Total: 30 marks]

SECTION B
Attempt any Two (2) questions in this section.
QUESTION THREE
(a)

IAS 38 Intangible assets states a number of criteria that have to be met for
development expenditure to be capitalised and when amortisation of such expenditure
should commence. The standard also covers other issues relating to intangible assets.
Required
State the criteria that should be met for development expenditure to be capitalised and
explain when amortisation of development expenditure should commence.
(7 marks)

(b)

IAS 37 Provisions, contingent assets and contingent liabilities explains when a provision
for a particular transaction should be recognised in the financial statements and the
amount at which it should be recognised among others.
Required:
Define a provision and state the criteria that should be met for a provision to be
recognised in the financial statements.
(4 marks)

(c)

IAS 36 Impairment of assets describes the allocation of impairment loss of a cash

generating unit among other matters relating to impairment of assets.
Required:
Define a cash generating unit and describe how impairment loss of a cash generating
unit should be allocated.
(5 marks)

(d)

IAS 23 Borrowing costs covers the treatment of borrowing costs relating to qualifying
assets among other matters.
Required
Define a qualifying asset and state three transactions that must be taking place for
capitalisation of borrowing costs to be started.
(4 marks)
[Total: 20 marks]

QUESTION FOUR
The following information about Killion Ltd, a private company, has been provided to you
comprising an opening statement of financial position as at 1stFebruary 2013 and a listing of the
companys ledger accounts as at 31stJanuary 2014, after the draft operating profit of K78 million
had been calculated.
Killion Ltds
Statement of financial position as at 1stFebruary 2013
Assets
Non-current
Property, plant and equipment
Investment at cost

Kmillion
458.50
84.50
543.00

Current
Inventory
Trade receivables
Bank

287.00
143.00
6.00
436.00
979.00

Total assets
Equity and Liabilities
Equity
Equity shares of K1 each
Share premium
Revaluation revenue
Retained earnings

125.00
25.00
60.00
351.50
561.50

Liabilities
Non-current
8% loan notes

216.00

Current
Trade payables
Taxation

157.00
44.50
201.50
417.50
979.00

Total liabilities
Total equity and liabilities
Ledger account listing at 31stJanuary 2014

Kmillion
250.00 Credit
40.00 Credit
351.50 Credit
78.00 Credit
90.00 Credit
199.00 Credit
133.50 Credit

Ordinary shares of K1 each

Share premium
Retained earnings 1st February 2013
Operating profit-year to 31st January 2014
Revaluation reserve
8% loan note
Trade payables
8

Accrued loan interest

Taxation
Land and building at valuation
Plant at cost
Building: Accumulated depreciation 31st January 2014
Plant: Accumulated depreciation 31st January 2014
Investments at cost
Trade receivables
Inventory-31st January 2014
Bank balance
Investment income received
Profits on sale of investments
Loan interest paid
Ordinary dividends paid

1.50 Debit
5.50 Debit
311.50 Debit
423.00 Debit
34.00 Credit
188.00 Credit
41.00 Debit
252.00 Debit
216.50 Debit
9.50 Credit
2.00 Credit
11.50 Credit
8.50 Debit
130.50 Debit

The following additional information is relevant

(i)

Property, plant and equipment in the statement of financial position at 1stFebruary 2013
comprise land and buildings at valuation of K246 million with accumulated depreciation of
K25 million and plant at cost of K350 million with accumulated depreciation of K112.5
million. There were no disposals of land and buildings during the year. The increase in
the revaluation reserve was entirely due to the revaluation of the companys land.

(ii)

Plant with a carrying value of K60 million (cost K117.5 million) was sold during the year for
K39 million. The loss on sale has been included in the profit before interest and tax.

(iii) Investments with a cost of K43.5 million were sold during the year for K55 million. There
were no further purchases of investments.
(vi) On 15th July 2013, a bonus issue of 1 for 10 ordinary shares was made utilizing the share
premium account. The remainder of the increase in ordinary shares was due to an issue
for cash on 29th July 2013.
(v)

The balance on the taxation account is after settlement of the provision made for the year
to 31 January 2013. Provision for the current year has not yet been made.

Required:
(a)

Prepare a statement of cash flows using the indirect method for Killion Ltd in accordance
with IAS 7 statements of cash flow for the year ended 31stJanuary 2014.
(14 marks)

(b)

Comment on the financial position of Killion Ltd as revealed by the statement of cash
flows for the year ended 31st January 2014.
(6 marks)
[Total: 20 marks]

QUESTION FIVE
(a)

Wonders supermarket - Lusaka has been in business for several years now. In April
2014, it opened another branch in the Southern Province of Zambia. Wonders
supermarket Lusaka is responsible for the purchase of all goods required by the
Southern Province branch. The goods are transferred to the branch at a mark-up of
20%.
The following transactions took place in the month of April 2014:
Kmillion
Goods sent to branch by head office (cost)

120.00

The branch sold goods to various customers on credit & cash basis:
Credit sales
Cash sales

15.40
96.00

The branch returned goods damaged in transit to head office (cost)

9.00

The branch carried out a stock count at the end of the month and got K18 million (cost)
as closing inventory figure.
The branch manager attributes any unaccounted for inventories to normal wastage and
pilferage.
Required:

(b)

i)

Prepare a branch inventory control account.

ii)

Prepare a branch mark-up account.

(4 marks)
(3 marks)

The following information relates to a bridge being constructed by Cata Engineering

Limited. The construction started on 1st July 2013 and it is expected to be completed on
31st December 2015.
K4.6 billion is the agreed contract price.
Period to
30th September 2013
Kmillion
132
240
44
950

Raw material purchases (1)

Labour costs (2)
Overhead costs (3)
Progress payments

10

Year ended
30th September 2014
Kmillion
900
720
132
1,900

Additional information:
1)

10% and 20% of materials purchased remained at 30th September 2013 and 30th
September 2014 respectively.

2)

All labour costs relate to the contract.

3)

The property, plant and equipment being used on this contract was hired from
Sado Equipment at the beginning of the contract at an annual rental payment of
K252 million. This amount has not been included in the above figures.

4)

Cata Engineering Limited has estimated K882 million, exclusive of rental charges,
as the additional costs to be incurred to complete the bridge construction.

5)

Cata Engineering Limited recognises profit on contracts based on percentage of

completion calculated as:
Contract costs incurred to date
Total estimated contract costs

Required
Prepare a statement of profit or loss (extract) for the year ended 30th September 2014
and statement of financial position (extract) as at 30th September 2014 of Cata
Engineering Limited.
(12 marks)
[Total: 20 marks]
END OF PAPER

11

L1: FINANCIAL REPORTING

SUGGESTED SOLUTIONS
DECEMBER 2015 EXAMINATIONS
SOLUTION ONE
a)

Goodwill in Stillbase
Consideration transferred:

Kmillion

Share exchange (K22.5m/3shares x 2 shares x K6)

10% loan note (K22.5m/300 shares x K80)
Fair value of NCI

Less net assets acquired:

Share capital
Share premium
Pre acquisition retained earnings:
{K22.5m + (6/12 x K27m)}
Fair value adjustment

Kmillion
90.00
6.00
29.00
125.00

30.00
12.00
36.00
24.00
102.00
23.00

Goodwill

Note:
The fair value of the share exchange is the market price of the shares
issued by the acquirer

The fair value of the loan note is its nominal value.

Carrying value of Assbase

Cost of investment:
Share exchange: (6mshs/4shs x 3 shares x K6)
Cash (6m x K1)

Kmillion
27.00
6.00
33.00

Note; the question asks for Goodwill and carrying value of Assbase on the date of
acquisition. This should exclude effect of impairment at the end of an accounting
period and share of associates post acquisition profits.

12

b)

The Hillbase Group

Consolidated statement of profit or loss for the year ended 30
September 2013
Kmillion
Revenue (225m + (122.1m x 6/12) 30m) w2
256.05
Cost of sales (142.2m + (59.1 x6/12) 30m + 6m + 1.5m)
(149.25)
Gross profit
106.80
Operating expenses (31.44 + (27m x6/12) + 2.25 imp loss)
(47.19)
Finance cost {0.51 (10% x 6m x 6/12months)}
(0.21)
Share of profit of associate {40% x 6/12 x 12m)}
2.40
Profit before tax
61.80
Income tax expense {14.4m + (9m x 6/12)}
(18.90)
Profit for the year
42.90
Profit attributable to:
Owners of the parent
39.90
Non-controlling interest{25% x (27m x 6/12 1.5m)}
3.00
42.90

c)

Movement on consolidated retained earnings

Kmillion
54.00
39.90
(20.00)
73.90

Balance brought forward (parent only no subsidiary yet)

Profit for the year attributable to owners of the parent
Equity dividends paid
Balance carried forward

WORKINGS
1. Group structure:
Hillbase investment in:
75%

40%

6 months

6 months

Date acquired

date acquired

Stillbase

Assbase

13

Hillbase investment in Stillbase:

22.5m shares/30m shares x 100 = 75% NCI 25%
Hillbase investment in Assbase:
6m shares/15m shares x 100 = 40%
2.
Intra group trading
Dr Revenue
Cr Cost of sales
3. Unrealized profit
Dr Cost of sales (1/2 x12m)
Cr Inventories

Kmillion
30

Kmillion
30

6
6

4. Fair value adjustments:

At acquisition date

movement

(1.4.13)
Kmillion

at reporting date
(30.9.13)

Kmillion

Kmillion

Land

Plant

15

(1.50)

13.50

24

(1.50)

22.50

Goodwill

SPL & NCI

14

SOLUTION TWO
a) Recalculation of profit for the year to 31st August 2014.
Kmillion
Retained profit for the year to 31st August 2014
Add: Dividends paid W8
Profit for the period before adjustments
Adjustments:
Add: Finance cost reversal W3
Add: Sales commission W6
Add: Other investment gain 168 -150
Less: Interest on loan W5
Less: Operating lease rental
Less: Goods sold on behalf of Peedo
Less: Depreciation charge W1
Less: Market research cost wrongly capitalised
Less: Income tax expense W7
Recalculated profit for the period
Less: Dividends paid
Recalculated retained profit for the period

250.00
120.00
370.00
4.00
1.00
18.00
(20.00)
(12.00)
(10.00)
(71.93)
(25.00)
(80.86)
173.20
(120.00)
53.21

b) Redrafted statement of financial position of Nanado Limited as at 31st

August 2014.
Kmillion
Assets
Non-current assets
Property, plant and equipment W4
Other Investment 150+18
Development cost 25-25

515.60
168.00
683.60

Current
Inventory
Trade receivables 50 10W6
Commission receivable W6
Bank

45.00
40.00
1.00
14.00
100.00
783.60

Total assets
15

Equity and liabilities

Equity
Equity shares of K0.50 each
Revaluation surplus 27.53W2 9.64W7
Retained earnings 100 + 53.21
Total equity
Liabilities
Non-current
Deferred tax 61.50+17.50 (35% x 50)
Loan
Obligation under finance lease 23.20 23.20W3
Current
Trade payables
Taxation
Other payables
Accrued loan interest W5
Obligations under finance lease 8.80 8.80
Total liabilities
Total equity and liabilities

200.00
17.89
153.21
371.10

79.00
200.00
279.00
30.80
73.00
9.70
20.00
133.50
412.50
783.60

Workings
W1

Depreciation charge
Kmillion
8.53
15.00
50.00
6.40
(8.00)
71.93

Buildings 2% x K426.25m
Furniture & fittings 25% x K60m
Motor vehicles 25% x K200m
Computers 20% x K32m
Leased plant 1/5 x K40m reversal
W2

Revaluation surplus - Buildings

Kmillion
426.25
(93.78)
332.47
27.53
360.00

Cost
Depreciation 85.25+8.53
Carrying value at valuation
Revaluation surplus (bal. fig)
Revalued amount
16

W3

Leased plant
Liability
1.9.13
31.8.14
31.8.14

Fair value
Interest @10%
Rental

31.8.15
31.8.15

Interest @10%
Rental

Kmillion
40.00
4.00
(12.00)
32.00
3.20
(12.00)
23.20

Amounts to reverse

Kmillion

1. Obligations under finance lease

Non-current liability
Current liability
32.00 23.20

23.20
8.80

2. Finance cost

W4

4.00

Property, plant and equipment

Kmillion
600.00
27.53
(71.93)
(40.00)
515.60

Balance per question

Add: Revaluation surplus W2
Less: Depreciation W1
Less: Leased plant
W5

10% Loan
Accrued loan interest 10% x K200m = K20m

W6

Goods sold on behalf of Peedo

Commission receivable 10% x K10m = K1m
Sales revenue/profit and trade receivables reduced by K10m

17

W7

Income tax
Over-provision
Provision for the year
Increase in deferred tax 35% x (50 27.53W4)
Income tax expense

Km
(22.00)
73.00
7.86
58.86

Deferred tax on revaluation surplus 35% x 27.53W4

9.64

Adjustment required:
Km
22.00
58.86
80.86

Over-provision
Income tax expense
W8

Dividends paid
Number of shares K200m/K0.50 = 400m
Dividends paid = 400m x K0.30 = K120m

SOLUTION THREE
a) Criteria to be met for development expenditure to be capitalised
i) The project should be clearly defined
ii) The expenditure for the project has to be separately identifiable
iii) The project should be commercially viable
iv) The project has to be technically feasible
v) The income of the project is expected to outweigh cost
vi) Resources should be adequate and available to complete the project
vii) There should be commitment from management to complete the project

Amortisation
This only commences once the project has been completed. When the project
is still going on, therefore, there should be no amortisation.

18

b) Provision definition
This is a liability of uncertain timing or amount. A liability is an obligation, legal
or constructive, as a result of past event or transaction that will result in an
outflow of future economic benefits to settle it.
Criteria to be met for a provision to be recognised
i)

There should be an obligation, legal or constructive, as a result of past

event or transaction.

ii)

It should be probable that future economic benefits will be required to

settle it.

iii)

The amount of the provision should be reliably estimated.

c) Cash generating unit definition

A cash generating unit is a group of net assets, including goodwill, capable of
independently generating income streams.
Allocation of impairment loss
i)

It is first allocated to assets that have specifically been impairment

ii)

Then the balance to goodwill, and

iii)

Finally to other assets on a pro rata basis. However, this should not result
in any asset being recognised in the financial statements at less than their
recoverable amount.

d) Definition of a qualifying asset

This is an asset that takes substantial time to be ready for its intended use or
sale.
Events or transactions to effect capitalisation of borrowing costs
i)

Expenditure on the asset is being incurred

ii)

Borrowing costs are being incurred

iii)

Activities are in progress that are necessary to prepare the asset for its
intended use or sale

19

SOLUTION FOUR
a)

Killions
Statement of cash flow for the year ended 31st January 2014
Cash flows from operating activities:
Kmillion
Kmillion
Operating profit (per question)
78.00
Adjustments for:
Depreciation: buildings (W1)
9.00
Plant (W1)
133.00
Loss on sale of plant (W1)
21.00
Decrease in inventory (287.00-216.50)
70.50
Increase in receivables (252.00-143.00)
(109.00)
Decrease in payables (157.00-133.50)
(23.50)
Cash generated from operations
179.00
Interest paid (8.50-1.50)
(7.00)
Income tax paid (W4)
(50.00)
Net cash from operating activities
122.00
Cash flows from investing activities:
Purchase of plant (w1)
(190.50)
Purchase of land and building (w1)
( 35.50)
Investment income
2.00
Proceeds from sale plant
39.00
Proceeds from sale of investment
55.00
Net cash used in investing activities
(130.00)
Cash flows from financing activities:
Proceeds from issue of shares
140.00
Loan repayment
(17.00)
Dividends paid
(130.50)
Net cash used in financing activities
(7.50)
Net decrease in cash and cash equivalent
(15.50)
st
Cash and cash equivalents at 1 February 2013
6.00
st
Cash and cash equivalents at 31 January 2014
(9.50)

b) Financial position
Operating activities
Killion shows healthy operating cash inflow of K179 million (prior to finance costs
and taxation. This is an important figure as it is often used as a basis for estimating
the companys future maintainable cash flows.

20

All things being equal, (i.e. no inevitable annual expected variations) cash generated
from operations figure is more likely to be repeated than most other figures in the
statement which tend to be one off cash flows such as raising loans, purchasing
non-current assets etc.
Cash generated from operations, after the deduction of net working capital of
K62.5million is more than sufficient to cover the companys taxation payments of
K50million and K7million respectively and leaves an amount to be used to contribute
to the funding of the increase in non-current assets.
It is usually a serious concern if interest and income tax payments were having to
be funded by loan capital or proceeds from share issue or sale of non-current
assets.
Investing activities
The statement of cash flows shows considerable investment in non-current assets,
in particular an increase in property, plant and equipment of K226million, an
increase of about 38% on PPE brought forward. Assuming the investment is for
increasing capacity and not replacing old assets, this bodes well for the future wellbeing of the company.
Financing activities
Much of the increase in investing activities appear to have been financed by the
issue of shares amounting to K140million, the balance of increase in investment
should have been financed by proceeds from sale of other assets and investment
income. This signifies that the companys shareholders appear reasonably pleased
with the companys past performance or they would not be very willing to purchase
further shares

Cash position
The overall effect of the years cash flows has worsened the companys cash
position by an increased net cash liability of K15.5million. The cash at the bank of
K6million at the beginning of the year has now gone. However, compared to the
cash generating ability of the company, the K15.5million is relatively small amount
and should be relieved by operating cash inflow in the near future.

21

Workings
1. Non-current assets:
Land and buildings
Valuation b/f
Revaluation surplus(90-60)
Acquisitions (balancing figure)
Valuation c/f

Kmillion
246.00
30.00
35.50
311.50

Plant
Cost b/f
Disposals at cost
Acquisitions (balancing figure)
Cost c/f

350.00
(117.50)
190.50
423.00

Depreciation-buildings
Accumulated depreciation b/f
Charge for the year(balancing figure)
Depreciation c/f

25.00
9.00
34.00

Depreciation-plant
Accumulated depreciation b/f
Disposals
Charge for the year (balancing figure)
Accumulated depreciation c/f

112.50
(57.50)
133.00
188.00

Disposal of plant
Carrying value of disposed plant
Proceed from sale
Excess of carrying value over proceed (loss on disposal)

60.00
39.00
21.00

2. Proceeds from issue of shares:

Ordinary shares b/f
Bonus issue (125m shares / 10 shares x 1 share x K1)
Issue of shares for cash (balancing figure)
Ordinary shares c/f
Share premium b/f
Bonus issue
Increase in premium on cash issue

125.00
12.50
112.50
250.00
25.00
(12.50)
27.50

22

Balance c/f

40.00

Total proceeds from share issue (K112.50 + K27.50)

140.00

3. Movement in revaluation reserve

Balance b/f
Increase (balancing figure)
Balance c/f

60.00
30.00
90.00

4. Income tax paid

Tax payable b/f
Cash paid (balancing figure)
Tax receivable c/f

44.50
50.00
5.50

SOLUTION FIVE
a) (i)

Branch Inventory Control Account

Km

Goods sent to branch

144.00

Km
Cash: sales
Branch receivables: sales
Goods returned to head office
Mark up account: Wastage &
Pilferage (bal.fig)
Balance c/f

144.00
(ii)

96.00
15.40
10.80
0.20
21.60
144.00

Branch Mark-up Account

Km

Branch inventory control a/c:

Mark up on goods returned 1.80
Branch inventory control a/c:
Wastage & pilferage
0.20
Profit or loss (bal.fig)
18.40
Bal. 25% x 18
3.60
24.00

Km
Branch inventory control a/c:
Mark up on goods sent to branch 24.00

24.00

23

b) Statement of profit or loss (extract) for the year ended 30th September
2014
Km
Revenue (1,837.2/3,500) x 4,600
2,414.61
Cost of sales
(1,837.20)
Profit for the year
577.41
Statement of financial position (extract) as at 30th September 2014
Km
Current assets
Inventory of raw materials 20% x 900
180.00
Amount due from contract customer W4
176.80

Workings
W1 contract duration 2.5years
Period to 30th September 2013 0.25years
Period to 30th September 2014 1year
Period to date
1.25years
W2

Calculation of overall profitability of contract

Period to
30/09/13
Kmillion
Raw materials used:
90% x 132
118.80
(10%x132) + (80%x900)
Labour costs
240.00
Overhead costs (given)
44.00
Rental 3/12 x 252
63.00
Costs incurred to date
465.80
Estimated costs to completion:
Given
Rental 1.25years x 252
Total estimated costs to completion
Total contract costs
Contract price
Estimated contract profit

24

Year to
30/09/14
Kmillion

733.20
720.00
132.00
252.00
1,837.20

Total to date
Kmillion
118.80
733.20
960.00
176.00
315.00
2,303.00
882.00
315.00
1,197.00
3,500.00
4,600.00
1,100.00

W3

Calculation of percentage of completion

For the year to
30/09/14
Costs incurred to date
=
1,837.20
Total contract costs
3,500.00
=

W4

52.49%

For the period to

30/09/14
2,303.00
3,500.00
65.80%

Amount due from/ (to) contract customer

Costs incurred to date W2
Add: Recognised profit 65.80% x 1,100W2
Less: Progress payments to date 950+1,900
Amount due from contract customer

THE END OF SOLUTIONS

25

Km
2,303.00
723.80
(2,850.00)
176.80