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FAR811S- ADVANCED FINANCIAL ACCOUNTING AND REPORTING- 1ST OPP - JUNE 2023 |
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nAmlBIA unlVERSITY
OF SCIEnCE Ano TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE
QUALIFICATION : BACHELOR OF ACCOUNTING HONOURS
QUALIFICATION CODE: 08 BOAH
COURSE CODE: FAR811S
LEVEL: 8
COURSE NAME: ADVANCEDFINANCIALACCOUNTING
AND REPORTING
SESSION: June 2023
PAPER: THEORYAND CALCULATIONS
DURATION: 3 hours
MARKS: 100
EXAMINER($)
FINAL ASSESSMENT-1 st Opportunity
D W Kamotho
MODERATOR: Dr E Wealth
INSTRUCTIONS
1. Answer ALL questions in blue or black ink only.
2. Write clearly and neatly.
3. Start each question on a new page and number the answers clearly.
4. No programmable calculators are allowed.
5. Questions relating to the paper may be raised in the initial 30
minutes after the start of the paper. Thereafter, candidates must use
their initiative to deal with any perceived error or ambiguities & any
assumption made by the candidate should be clearly stated.
6. Any resemblance to any people, places, organisations or anything is
purely coincidental.
THIS QUESTION PAPER CONSISTS OF 9 PAGES (excluding the front page)
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Question 1
(20 marks)
Mr Van Deek the Managing director of Van Deek Manufacturing Limited has
questioned the recognition and disclosure of a lease entered into for machinery to the
value of N$ 3 million, which is used in the company's manufacturing process.
Mr. Van Deek is of the opinion that it is unnecessary to capitalise the machinery and
the corresponding liability, and that too much information will be disclosed when doing
so.
Required:
Explain to Mr Van Deek, by ONLY referring to the fundamental qualitative
characteristics of the conceptual framework why the lease should be capitalised and
disclosed as such.
(20 marks)
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Question 2
(40 marks)
Kimbo's investments include two subsidiaries, Githu and Katus. The draft statements
of financial position of the three entities at 30 September 2020 were as follows:
Assets
Non-current assets:
Property, plant and equipment (Notes
1 and 3)
Intangible assets (Note 1)
Investments (Notes 1, 3 and 4)
Current assets:
Inventories (Note 5)
Trade receivables (Note 6)
Cash and cash equivalents (Note 6)
Total assets
Equity and liabilities
Equity
Share capital (50c shares)
Retained earnings (Notes 1 and 3)
Other components of equity (Notes 1,
3 and 4)
Total equity
Kimbo
N$'000
380,000
80,000
497,000
957,000
100,000
80,000
10,000
190,000
1,147,000
150,000
498,000
295,000
943,000
Githu
N$'000
355,000
40,000
Nil
395,000
70,000
66,000
15,000
151,000
546,000
200,000
186,000
10,000
396,000
Katus
N$'000
152,000
20,000
Nil
172,000
65,000
50,000
10,000
125,000
297,000
120,000
60,000
2,000
182,000
Non-current liabilities:
Provision (Note 7)
Long-term borrowings (Note 8)
Deferred tax
Total non-current liabilities
34,000
60,000
35,000
129,000
Nil
50,000
30,000
80,000
Nil
45,000
25,000
70,000
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Current liabilities:
Trade and other payables (Note 6)
Short-term borrowings
Total current liabilities
Total equity and liabilities
50,000
25,000
75,000
1,147,000
55,000
15,000
70,000
546,000
35,000
10,000
45,000
297,000
Note 1 - Kimbo's investment in Githu
On 1 October 2017, Kimbo acquired 300 million shares in Githu by means of a share
exchange of one share in Kimbo for every two shares acquired in Githu.
On 1 October 2017, the market value of an Kimbo share was $2-40. Kimbo incurred
directly attributable costs of $2 million on acquisition of Githu. These costs comprised:
- N$0·8 million - cost of issuing own shares, debited to Kimbo's share premium
account within other components of equity.
- N$1·2 million due diligence costs - included in the carrying amount of the
investment in Githu in Kimbo's own statement of financial position.
There has been no change to the carrying amount of this investment in Kimbo's own
statement of financial position since 1 October 2017.
On 1 October 2017, the individual financial statements of Githu showed the following
reserves balances:
- Retained earnings $125 million.
- Other components of equity $10 million.
The directors of Kimbo carried out a fair value exercise to measure the identifiable
assets and liabilities of Githu at 1 October 2017. The following matters emerged:
- Plant and equipment having a carrying amount of $295 million had an
estimated market value of $340 million.
The estimated remaining useful economic life of this plant at 1 October 2017 was five
years. None of this plant and equipment had been disposed of between 1 October
2017 and 30 September 2020.
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- An in-process research and development project existed at 1 October 2017 but did
not meet the recognition criteria of IAS 38 - Intangible Assets. The fair value of the
research and development project at 1 October 2017 was $20 million. The project
started to generate economic benefits on 1 October 2018 over an estimated period of
four years.
The above two fair value adjustments have not been reflected in the individual financial
statements of Githu. In the consolidated financial statements, these fair value
adjustments will be regarded as temporary differences for the purposes of computing
deferred tax. The rate of deferred tax to apply to temporary differences is 20%. Kimbo
uses the proportion of net assets method to calculate non-controlling interests in Githu.
Note 2 - Impairment review of goodwill on acquisition of Githu.
No impairment of the goodwill on acquisition of Githu was evident when reviews were
carried out on 30 September 2018 and 2019. On 30 September 2020, the directors of
Kimbo concluded that the recoverable amount of the net assets (including the
goodwill) of Githu at that date was N$450 million. Githu is regarded as a single cash
generating unit for the purpose of measuring goodwill impairment.
Note 3 - Kimbo's investment in Katus.
On 1 October 2019, Kimbo acquired 144 million shares in Katus by means of a cash
payment of $125 million.
Kimbo incurred costs of $1 million associated with this purchase and debited these
costs to administrative expenses in its draft statement of profit or loss for the year
ended 30 September 2020. There has been no change in the carrying amount of this
investment in the financial statements of Kimbo since 1 October 2019.
On 1 October 2019, the individual financial statements of Katus showed the following
reserves balances:
- Retained earnings of N$45 million.
- Other components of equity N$2 million.
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On 1 October 2019, the fair values of the net assets of Katus were the same as their
carrying amounts with the exception of some land which had a carrying amount of
$100 million and a fair value of $130 million. This land continued to be an asset of
Katus at 30 September 2020.
The fair value adjustment has not been reflected in the individual financial statements
of Katus. In the consolidated financial statements, the fair value adjustment will be
regarded as a temporary difference for the purposes of computing deferred tax. The
rate of deferred tax to apply to temporary differences is 20%.
There was no impairment of the goodwill arising on acquisition of Katus in the
consolidated financial statements at 30 September 2020. Kimbo uses the proportion
of net assets method to calculate non-controlling interests in Katus.
Note 4 - Other investments.
Apart from its investments in Githu and Katus, the investments of Kimbo included in
the statement of financial position at 30 September 2020 are all financial assets which
Kimbo measures at fair value though other comprehensive income. These other
investments are correctly measured in accordance with IFRS 9 - Financial
Instruments.
Note 5 - Intra-group sale of inventories.
The inventories of Kimbo and Katus at 30 September 2020 included components
purchased from Githu in the last three months of the financial year at a cost of $20
million to Kimbo and $16 million to Katus. Githu supplied these goods to both Kimbo
and Katus at a mark-up of 25% on the cost to Githu.
Note 6 - Trade receivables and payables.
Group policy is to clear intra-group balances on a given date prior to each year end.
All group companies had complied with this policy at 30 September 2020, so at that
date there were no outstanding intra-group balances.
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Note 7 - Provision.
On 30 September 2020, Kimbo finalised the construction of an energy generating
facility. The facility has an expected useful economic life of 25 years and Kimbo has a
legal requirement to decommission the facility at the end of its estimated useful life.
The directors of Kimbo estimated the costs of this decommissioning to be N$34 million
- based on prices prevailing at 30 September 2040. At an appropriate discount
rate, the present value of the cost of decommissioning the facility is N$1O
million.
The directors of Kimbo made a provision of N $34 million and charged this amount as
an operating cost in the financial statements of Kimbo for the year ending 30
September 2020.
Note 8 - Long-term borrowings.
On 1 October 2019, Kimbo issued 40 million $1 bonds at par. The cost of issuing the
bonds was $1 million and this cost was charged as a finance cost for the year ending
30 September 2020. No interest is payable on the bonds, but they are redeemable at
a large premium which makes their effective finance cost 8% per annum. The bonds
are included at a carrying amount of $40 million in the statement of financial position
of Kimbo at 30 September 2020.
Required:
Prepare the consolidated statement of financial position of Kimbo at 30 September
2020. You need only consider the deferred tax implications of any adjustments you
make where the question specifically refers to deferred tax.
(40 marks)
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Question 3
(20 marks)
Spray Ltd entered into a sale agreement with Power Ltd on 3rd March 2022.
The terms of the agreement were that spray will:
• supply 3300 light fitting to Power ltd in exchange for N$330,000
• grant a 10% early settlement discount for full payment received before 3rd of
May 2022.
On 3rd of March 2022, Spray Ltd fully anticipated that it would receive payment within
the required period and thus that the discount offered would be granted.
Spray limited:
• deliver the light fittings into Power Ltd on 5th of April 2022 and
• received the payment due from power on 31st of May 2022.
Required:
a. Using Spray limited general journal, prepare all journals necessary for the year
ended 31 December 201. Ignore tax.
(8 marks)
b. Provide a brief explanation to support your journals. Ignore loss allowances.
(12 marks)
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Question 4
(20 marks)
Namibia University of Science and Technology (NUST) borrowed N$20 000 000 at
an interest rate of 14% from the Development Bank of Namibia on 01 January 2021.
These funds were borrowed in order to build a classroom block in the lower campus
to cater for the increasing number of students in Windhoek. The classroom block is a
qualifying asset under IAS 23:
• Progress payments made in 2021 are as follows.
N$
On 01 January
6 000 000
On 01 July
12 000 000
On 01 September 2 000 000
• The surplus funds were invested in a fixed deposit earning interest at FNB
Namibia at 10% per annum.
• All banks in Namibia compounds interest charged and paid annually on 31
December.
• Construction began on 01 January 2021 and was still incomplete on 31
December 2021
• Construction however, had ceased between 01 June 2021 and 20 June 2021
while the floor concrete cured (a necessary part of the construction process).
Required:
a) Calculate the borrowing costs to be capitalised in terms of IAS 23 by NUST and
prepare the related journal entries relating to interest for the year ended 31
December 2021.
(10 Marks)
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b) Explain whether borrowing costs may be capitalised to the NUST classroom block
during the year ended 31 December 2021 assuming the following alternative
information.
i. Construction of the classroom block had not begun as of 31 December 2021
because the classroom block plans that were submitted to the City of
Windhoek (Cow) had failed to meet the CoW basic building regulations.
ii. The classroom block plans were submitted during October 2021, and it was
expected that the CoW would give the necessary approvals to begin
construction of the classroom block in early 2022.
(10 Marks)
END OF QUESTION PAPER
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