THE INSTITUTE OF CHARTERED
ACCOUNTANTS (GHANA)
NOVEMBER 2011 EXAMINATIONS
(PROFESSIONAL)
PART 4
ADVANCED FINANCIAL REPORTING
(Paper 4.1)
Attempt ALL Questions
TIME ALLOWED:
Reading & Planning - 15 Minutes
Workings - 3 Hours
Page 1 of 12
QUESTION 1
(a) The need to develop agreed set of accounting standards to enhance high quality corporate
reporting cannot be over-emphasised.
You are required to:
(i) Explain why accounting standards are needed to help reporting entities and users of financial
statements. (4marks)
(ii) Outline any three (3) costs associated with increased disclosure of information in the
financial statements to the reporting entity. (3 marks)
(b) ABC Ltd issued a GHS5,000,000 18% convertible loan note at par on 1 January 2010 with
interest payable annually in arrears. Three years later, on 31 December 2012, the loan note
becomes convertible into equity shares on the basis of GHS100 of loan note for 50 equity
shares or it may be redeemed at par in cash at the option of the loan note holder. The
financial accountant of the company has observed that the use of a convertible loan note was
preferable to a non-convertible loan note as the latter would have required an interest rate of
24% in order to make it attractive to investors. The present value of GHS1 receivable at the
end of the year, based on discount rates of 18% and 24% can be taken as:
18% 24%
GHS GHS
End of year 1 0·847 0· 806
2 0·718 0· 650
3 0·609 0·524
Required:
Show how the convertible loan note should be accounted for in ABC Ltd‟s income statement for
the year ended 31 December 2010 and statement of financial position as at 31 December 2010.
(8 marks)
(c ) Sika Ltd has been in business as a General Merchant for a number of years. During its
accounting year ended 30th April 2011, the following transactions took place:
GHS
(i) Purchases: 1st July 2010 160,000
1st January 2011 80,000
(ii) Sales 320,000
(iii) Sundry Expenses 38,000
The statement of Comprehensive Income for the year ended 30th April 2011 and the Statement of
Financial Position as at 30th April 2011, prepared on the Historical Cost Accounting basis were on
follows:
Page 2 of 12
INCOME STATEMENT
GHS GHS
Revenue 320,000
Cost of sales (260,000)
Gross profit 60,000
Operating expenses 38,000
Depreciation 6,000 (44,000)
Operation profit 16,000
STATEMENT OF FINANCIAL POSITION
GHS GHS
Property, plant and equipment 64,000
Depreciation (24,000) 40,000
Inventories 18,000
Net current monetary items 12,000 30,000
Net assets 70,000
Financed by: 49,000
Stated capital 21,000
Income surplus 70,000
Additional information:
(i) The inventories were valued using the FIFO method.
(ii) The Consumer Price Index (CPI) were:
INDEX
Purchase of Non-current Assets and issue of equity share 120
30th April 2010 215
1st July 2010 223
1st January 2011 238
Average for the year 226
30th April 2011 240
Required:
(i) Prepare Current Purchasing Power Financial Statements (Income Statement for the year
ended 30th April 2011 and Statement of Financial Position as at 30th April 2011).
(ii) A statement reconciling the Operating Profit of the two accounting systems – Historical cost
and Current Purchasing Power.
(15 marks)
(Total: 30 marks)
Page 3 of 12
QUESTION 2
(a) Countries and entities adopting International Financial Reporting Standards (IFRSs) for the
first time should consider the possible conflict of some provisions of IFRS with local
legislations. Such is the case in Ghana in respect of exclusion of subsidiary from
consolidated financial statements. IAS 27 “Consolidated and Separate Financial
Statements” and Ghana Companies Code, 1963 (Act 179) (under review) are in conflict in
respect of exclusion of subsidiary from consolidation.
Required:
Identify the conflicts between Section 127 of Ghana Companies Code 1963 (Act 179) and IAS 27,
Consolidated Separate Financial Statements as regards exclusion of subsidiary companies from
consolidation.
(5 marks)
(b) In its quest to dominate the textiles industry in Ghana, management of Tema Ltd decided
to acquire shareholdings in two entities in the industry, Akosombo Ltd and Juapong Ltd.
Consequently, on 1 January 2010, Tema Ltd acquired the following non-current investments
in the secondary market:
i) 15 million ordinary shares in Akosombo Ltd. The consideration was settled as follows:
A share exchange (immediate) of one share in Tema Ltd for every two shares in
Akosombo Ltd, (The market price of each Tema Ltd‟s share at the date of
acquisition was GHS4) , plus
A cash consideration of GHS2 per each acquired Akosombo Ltd share to be settled
on 1st January 2011. The cost of capital for Tema Ltd approximates 20% per annum.
ii) 6 million of the ordinary shares of Juapong Ltd at a cost of GHS4.50 per share in cash.
Payment was effected immediately. By this acquisition, Tema Ltd could exercise significant
influence in the operating and financial policies of Juapong Ltd
The share exchange and the deferred considerations of the above investments have not been
recorded by Tema Ltd.
The financial statements of Tema Ltd, Akosombo Ltd and Juapong Ltd for 2010 financial
year are as follows:
Income statements for the year ended 31 December 2010
Tema Akosombo Juapong
GHS‟000 GHS‟000 GHS‟000
Revenue 193,000 90,000 76,000
Cost of sales (126,000) (64,000) (40,000)
Page 4 of 12
Gross profit 67,000 26,000 36,000
Distribution and admin expenses (22,000) (10,400) (6,000)
Finance costs (1,000) (600) -
Other Income 6,000 ______ ______
Profit before tax 50,000 15,000 30,000
Income tax expense (10,000) (3,000) (6,000)
Profit for the year 40,000 12,000 24,000
Statements of financial position as at 31 December 2010:
Tema Akosombo Juapong
GHS’000 GHS’000 GHS‟000
Assets
Non-current assets
Property, plant and equipment 95,000 52,000 90,000
Investments in shares 27,000
Available-for-sale investments 32,500
154,500 52,000 90,000
Current assets
Inventory 34,500 31,000 18,000
Trade receivables 16,000 7,500 12,000
Total assets 205,000 90,500 120,000
Equity and liabilities
Ordinary shares (all issued at GHS1 each) 50,000 20,000 20,000
Retained earnings 90,000 44,000 80,000
140,000 64,000 100,000
Non-current liabilities
Loan notes 25,000 5,000 5,000
Current liabilities 40,000 21,500 15,000
Total equity and liabilities 205,000 90,500 120,000
The following information is relevant:
(i) At the date of acquisition, the fair values of Akosombo Ltd‟s assets were equal to their
carrying amounts with the exception of a landed property which had a fair value of
GHS2,000,000 below its carrying amount; This has not been reflected in the separate
Page 5 of 12
financial statements of Akosombo as at 31 December 2010. (Ignore depreciation
implication)
(ii) On 1 January 2010, Tema Ltd transferred an item of plant to Akosombo Ltd at its agreed fair
value of GHS13 million. Its carrying amount prior to the transfer was GHS10 million. The
estimated remaining life of the plant at the date of transfer was five years (straight-line
depreciation). Akosombo Ltd charges depreciation on plant to „cost of sale‟
(iii) In December 2010, Akosombo Ltd transferred some finished goods to Tema Ltd at a
transfer price of GHS15 million. Akosombo Ltd had marked up these goods by 25% on
cost. Tema Ltd had all of these goods still in its inventory at 31 December 2010. Also
included in the inventory of Juapong Ltd at 31 December 2010 were some raw materials
transferred from Tema Ltd at a transfer price of GHS5 million . Tema Ltd had also
marked up these goods by 25% on cost. There were no intra-group payables/receivables at
31 December 2010.
(iv) The available-for-sale investments are included in Tema Ltd ‟s statement of financial
position (above) at their fair value on 1 January 2010; they have a fair value of GHS36
million at 31st December 2010
(v) During the year ended 31 December 2010, the companies paid the following dividends and
were charged to the statements of changes in equity (retained earnings column).
Tema Ltd GHS25 million ( dividend per share of GHS0.50)
Akosombo Ltd Nil
Juapong Ltd GHS10 million (dividend per share of GHS0.50)
The „other income‟ in the separate income statement of Tema Ltd consists of the dividend
received from Juapong and the gain on transfer of plant to Akosombo Ltd.
vi) It is the group‟s policy to value non-controlling interest at full fair value. The market price of
a share of Akosombo Ltd immediately prior to the acquisition of controlling interest by
Tema Ltd was GHS4.80.
(vii) Impairment tests on 31 December 2010 concluded that the value of the investments in both
Akosombo and Juapong were not impaired.
Required:
Prepare the consolidated income statement for the year ended 31 December 2010 and a
consolidated statement of financial position as at 31 December 2010.
(20 marks)
(Total: 25 marks)
Page 6 of 12
QUESTION 3
Sweet Potato Limited operates a large-scale commercial farm. It now plans to off-load some of its
shareholding to the public in order to raise funds to expand its operations.
Financial statements of Sweet Potato Limited are as follows:
Statement of Comprehensive Income for the year-ended 31st December, 2010
GHS
Turnover 245,800
Cost of sales 117,300
Gross profit 128,500
Selling, general & administrative expenses 87,140
Earnings before interest & tax 41,360
Interest 3,360
Profit before taxation 38,000
Taxation at 25% 9,500
Profit after tax 28,500
Income Surplus Account for the year ended 31st December 2010
GHS
Balance at 1/1/2010 95,940
Profit for the year 28,500
Dividends paid (12,400)
Balance at 31/12/2010 112,040
Statement of Financial Position as at 31st December, 2010
GHS GHS
Property, plant & equipment 197,500
Patents 16,400
Development expenditure 26,100
240,000
Current Assets
Inventories 43,400
Receivables 25,002
Bank and cash 11,888
80,290
Current Liabilities
Payables 30,800
Net Current assets 49,490
289,490
14% Medium-term loan (24,000)
Net assets 265,490
Page 7 of 12
Financed By:
Stated capital 100,000
Capital surplus 53,450
Income surplus 112,040
265,490
Additional Information:
(i) Stated Capital is made up as follows: GHS
Ordinary shares (issued @ GHS0.20 each) 80,000
22% Irredeemable Preference Shares 20,000
100,000
(ii) A review of the development expenditure revealed that 60% of it is worthless.
(iii) An independent valuer has placed values on some of the assets, detailed as follows:
GHS
Property, plant & equipment 222,000
Inventories 32,400
Receivables 20,000
(iv) Profit forecasts for the next five years are as follows:
Profit before Tax Depreciation Charge
GHS GHS
2011 29,800 2,200
2012 32,000 2,450
2013 38,500 3,100
2014 39,600 4,050
2015 43,100 4,260
The estimated profit before tax figures are arrived at after charging the estimated
depreciation.
(v) Yam Limited is a competitor listed on the Ghana Stock Exchange and data extracted from its
recently published statements revealed the following:
Market capitalisation = GHS2,000,000
Number of ordinary shares = 800,000
Earnings per share = GHS0.20 (20 pesewas)
Dividend payout ratio = 80%
(vi) The patents represent a license to produce an improved variety of potatoes and is expected to
generate a pre-tax profit of GHS20,000 per year for the next five years.
(vii) The cost of capital of Sweet Potato Limited is 18%.
Required:
(a) Determine the value to be placed on each share of Sweet Potato Limited using the following
methods of valuation:
Page 8 of 12
(i) Net assets
(ii) Prices-earnings ratio
(iii) Dividend yield
(iv) Discounted cash flow
(12 marks)
The discount factors and annuity at 18% for the relevant years are as follows:
Year 1 2 3 4 5
Discount factor 0.847 0.718 0.609 0.516 0.437
Annuity 0.847 1.565 2.174 2.690 3.127
(b) Outline any three (3) reasons why the dividend yield of Yam Ltd should be adjusted before
it is used to value the shares of Sweet Potato Limited.
(3 marks)
(Total: 15 marks)
QUESTION 4
Malibu Limited, producers of telecommunication equipment has been making losses in recent
times. The directors have proposed a scheme of reorganization, to take effect on 1st October 2011.
The statement of financial position of the company at 30th September 2011 is as follows:
Statement of Financial Position as at 30 September, 2011
ACCUM. NET BOOK
COST DEPN. VALUE
GHS GHS GHS
Fixed assets
Property, plant & equipment 100,000 20,000 80,000
Plant and equipment 250,000 60,000 190,000
Vehicles 45,000 15,000 30,000
395,000 95,000 300,000
Current assets
Inventory 40,000
Trade receivable 30,000
Bank 10,000
80,000
Less
Current liabilities
Trade payables 140,000
(60,000)
Net assets 240,000
Page 9 of 12
Financed By:
Stated capital
Issued and fully paid
100,000 7% preference shares of GHS1.00 per share 100,000
400,000 ordinary share of GHS0.75 fully paid 300,000
400,000
Income surplus (160,000)
Net assets 240,000
Additional information:
(i) The ordinary shares are to be written down to GHS0.25 per share and then to be converted
into new ordinary shares of GHS1.00 per share fully paid.
(ii) The preference shareholders are to receive 40,000 ordinary shares of GHS1.00 per share,
fully paid in exchange for their preference shares.
(iii) Dividends on 7% preference are two years in arrears. In consideration for waiving their
rights to arrears of preference dividend, the preference shareholders have agreed to accept
10,000 new ordinary shares of GHS1.00 per share, fully paid in final settlement.
(iv) The creditors have agreed to take 100,000 new ordinary shares of GHS1.00 per share, fully
paid in part settlement of the amounts due them.
(v) The balance on the income surplus account is to be written off.
(vi) Some assets of the company have been revalued and are to be incorporated in the accounts
as follows:
GHS
Freehold premises 100,000
Plant and equipment 125,000
Vehicles 25,000
Inventories 36,000
(vii) An allowance of GHS3,500 is to be made for doubtful debts.
(viii) The ordinary shareholders have agreed to inject additional GHS90,000 cash by acquiring
120,000 ordinary shares at GHS0.75 per share fully paid.
(ix) Reorganisation costs amounted to GHS7,500.
Required:
a. Prepare capital reduction account, stated capital account and bank account.
(7 marks)
b. Prepare statement of financial position of Malibu Limited after the reorganization.
(5 marks)
c. Identify any three (3) reasons for which a company may opt to carry out a capital reduction
scheme. (3 marks)
(Total: 15 marks)
Page 10 of 12
QUESTION 5
(a) Drums Limited is engaged in the procurement of animal skins and tanning same for the
production of church drums, hats, shoes and wallets. At the annual general meeting to
consider the financial statements for the year ended 31st December 2010, some shareholders
agitated over what they perceived to be the declining fortunes of the company.
The financial statements of drums Ltd for 2010 and 2009 are as follows:
Statement of financial Position as at 31st December,
2010 2009
GHS GHS
Intangible assets - 380,000
Non-current assets 1,224,000 1,204,000
1,224,000 1,584,000
Current assets 288,400 300,250
Inventories 299,800 348,050
Receivables - 36,500
Marketable securities 60,000 108,000
Cash and bank 648,200 792,800
Current liabilities 504,900 480,700
Trade payable 264,000 240,600
Other payables 768,900 721,300
(120,700) 71,500
Net current (Liabilities)/Assets 1,103,300 1,655,500
36,000 60,000
12% Medium-term loan 1,067,300 1,595,500
Net Assets
Financed By: 500,000 500,000
Stated capital 227,500 154,800
Capital surplus 339,800 940,700
Income surplus 1,067,300 1,595,500
Statements of Comprehensive Income for the year ended 31st December:
2010 2009
GHS GHS
Turnover 2,280,000 2,400,000
Cost of sales 1,920,000 1,884,000
Gross profit 360,000 516,000
Less: Selling, General & Admin. Expenses 240,000 252,000
Earnings before interest & tax 120,000 264,000
Less: Interest 4,320 7,200
Profit before tax 115,680 256,800
Taxation 28,980 64,200
Page 11 of 12
Profit attributable to shareholders 86,760 192,600
Dividend 65,070 96,300
Retained profit 21,690 96,300
Statement of Cash Flows for the year ended 31st December,
2010 2009
GHS GHS
Net cash inflow from operating activities 51,950 432,000
Investing activities (84,750) (2,150
Financing activities (15,200) 25,400
Net (Decrease)/Increase in cash & cash equivalents (48,000) 455,250
Cash & cash equivalents at beginning 108,000 (347,250
Cash & cash equivalents at 31st December 60,000 108,000
Additional information:
(i) Drums Ltd is registered with 500,000 ordinary shares of no par value out of which 200,000
shares were issued at GHS1.00 per share.
(ii) The company‟s shares are currently trading on the Ghana Stock Exchange at GHS2.50 per
share as at 31st December, 2010 (2009: GHS1.50).
(iii) Cost of sales includes depreciation of GHS32,400 (2009: GHS27,600).
(iv) Inventories at 1st January, 2009 were valued at GHS260,500.
Required:
Review the performance of Drums Limited for the year 2010.
Your review should include comments on the appropriateness of the level of dividend paid.
(15 marks)
Page 12 of 12
