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FAR811S%3DADVANCED FINANCIAL ACCOUNTING AND REPORTING-1ST OPP- JUNE 2025 |
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nAm I BI A un IVE RSITY
OF SCIEnCE Ano TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE
QUALIFICATION : BACHELOR OF ACCOUNTING HONOURS
QUALIFICATION CODE: 08 BOAH
COURSE CODE: FAR811S
SESSION: June 2025
LEVEL: 8
COURSE NAME: ADVANCEDFINANCIALACCOUNTING
AND REPORTING
PAPER: THEORYAND CALCULATIONS
DURATION: 3 hours
MARKS: 100
EXAMINER{S)
FINAL ASSESSMENT - pt 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 6 PAGES (excluding the front page)
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Question 1
The following information relates to Sunrise Enterprises.
40 marks
(a) Contract with a Modification Payment
Sunrise Enterprises is a manufacturer of electronic gadgets. On 15 June 2024, Sunrise
entered into a nine-month contract to supply its flagship smart device to a multinational
retailer. Under the contract the retailer committed to purchase at least N$25 million of devices
over the period. The contract required Sunrise to pay a non-refundable fee of N$2.5 million
to the retailer on contract inception to cover the costs of adapting the retailer's in-store
display. Sunrise paid the fee on 15 June 2024. In August 2024, Sunrise delivered devices
with an invoice value of N$3.2 million.
(9 marks)
(b) Contract with a Volume Discount
On 1 April 2024, Sunrise entered into a contract with another customer to sell Device X at a
price of N$250 per unit. The contract specifies that if the customer purchases more than 800
units over a nine-month period, the price per unit is retrospectively reduced to N$230.
For the quarter ending 30 June 2024, Sunrise sold 50 units of Device X and initially assessed
that the customer was unlikely to exceed the 800-unit threshold. In November 2024, following
an upswing in orders, the customer purchased an additional 400 units. Sunrise now
concludes that it is highly probable that the total purchases during the contract period will
exceed 800 units.
(11 marks)
(c) Sale with a Right of Return and Financing Component
On 31 December 2024, Sunrise sold Device Y to a customer for a contract consideration
of N$16,500, with payment due 18 months after delivery. The customer obtained control of
the device at contract inception. However, the contract grants the customer the right to return
the device withiri 60 days. The cash selling price of Device Y is N$13,000 - the price that
would apply under otherwise identical terms at delivery. Sunrise's cost of the device
is N$9,000.
(12 marks)
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(d) Costs Relating to a New Production Line
On 1 August 2024, Sunrise purchased a new production line for use in its factory. The
directors have capitalised the purchase cost but now need guidance on the treatment of the
following related expenditure:
• Testing costs of N$350,000 were incurred to ensure the production line functions
correctly. During the testing phase (August-September 2024), trial products were
produced and sold for a total of N$50,000.
• Training costs of N$250,000 were incurred to instruct employees in operating the new
line.
• Promotional expenses of N$900,000 were incurred to launch a new product
manufactured on the new line. The production line was declared ready for commercial
production on 1 October 2024.
(8 marks)
Required
Advise Sunrise on the accounting treatment of the transactions above in its financial
statements for the period ending 31 December 2024 (and up to 31 March 2025 for part (c)).
Illustrate your responses with journal entries where appropriate.
Note. The mark a/location is indicated against each part. (Total= 40 marks)
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Question 2
30 marks
The question consists of four independent parts. For each scenario, advise the acquirer on
the accounting treatment in accordance with IFRS 3 - Business Combinations. Provide
detailed explanations and illustrative journal entries where appropriate.
{a) Acquisition of a Subsidiary with an unfavorable Lessee Contract and Residual
Franchise
On 1 July 2022, DEF Limited acquired 100% of GHI Ltd, a specialist distributor. At the
acquisition date, the identifiable assets and liabilities of GHI Ltd are measured as follows:
Identifiable Assets
• Property, Plant & Equipment (PPE):
N$1,200,000
• Inventory:
N$500,000
• Trade Receivables:
N$300,000
• Patent (held by GHI for a technology licensed to DEF as part of a continuing franchise
arrangement):
N$250,000
Identifiable Liabilities
• Trade Payables:
N$350,000
• Liability arising from an unfavorable lease contract entered by GHI (the subsidiary
had signed a long-term lease with a counterparty of poor credit quality under adverse
terms):
N$150,000
The purchase consideration paid by DEF Limited is
N$2,500,000.
Required
Explain how DEF Limited should account for this business combination under IFRS 3. In
your answer, include:
- The measurement of identifiable assets and liabilities (with particular reference to the
unfavorable lessee arrangement and the residual patent/franchise arrangement);
- The calculation of net identifiable assets and goodwill (or gain on bargain purchase); and
- Illustrative journal entries at acquisition.
(9 marks)
{b) Acquisition with Earn-Out Provisions
On 1 October 2022, JKL Ltd acquired 70% of MNO Tech, a software development firm. The
fair value of MNO Tech's identifiable net assets is estimated at N$4,000,000. In addition, the
acquisition agreement includes an earn-out: if MNO Tech's annual revenue exceeds N$10
million within 12 months from the acquisition date, JKL Ltd will pay an additional N$600,000.
The base consideration is N$2,800,000.
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Required
Discuss how JKL Ltd should account for the earn-out under IFRS 3. Your answer should
address:
- The initial measurement of the contingent consideration at fair value;
- Its impact on the total acquisition cost and subsequent goodwill calculation; and
- Any remeasurement requirements after the acquisition date.
Support your discussion with relevant illustrative journal entries.
(11 marks)
c) Acquisition with Non-Controlling Interest
On 1 January 2023, PQR Corp acquired an 85% interest in STU Retail, a chain of specialty
stores. At the acquisition date, STU Retail's identifiable net assets are measured at
N$6,000,000. PQR Limited elects to measure the non-controlling interest (NCI) at fair value,
which is determined to be N$1,200,000. The total purchase consideration paid by PQR
Limited is N$4,200,000.
Required
Explain how PQR Limited should account for:
- The measurement of NCI;
- The aggregation of total consideration (purchase consideration plus NCI); and
- The calculation of goodwill or a gain on bargain purchase.
Include detailed steps and illustrative journal entries in your explanation.
(7 marks)
d) Acquisition-Related Restructuring Costs
On 1 April 2023, UVW Pie acquired 100% of XYZ Logistics for a total purchase price of
N$5,500,000. In connection with the acquisition, UVW Pie expects to incur integration
restructuring costs of N$400,000.
Required
Discuss the accounting treatment for these restructuring costs under IFRS 3. Should these
costs be included as part of the acquisition cost or recognised separately? Explain your
answer and provide appropriate illustrative journal entries.
(3 marks)
For each scenario, advise the acquirer on the accounting treatment in accordance with IFRS
3 - Business Combinations. Provide detailed explanations and illustrative journal entries
where appropriate.
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Question 3
30 marks
On 1 January 2024, Stellar Limited issued 1,000 convertible bonds with the following terms:
• Nominal (Face) Value: N$1,000 per bond
• Total Proceeds: N$1,000,000
• Coupon Rate: 4% per annum (i.e. $40 per bond per year), with interest payable
annually in arrears
• Term: 3 years
• Conversion Feature: Each bond is convertible, at the option of the bondholder, into
20 ordinary shares at any time up to maturity
• Market Rate for Similar Non-convertible Debt: 8% per annum
At initial recognition, Stellar Limited applies split accounting by allocating the proceeds
between:
(a) a liability component measured as the present value of the contractual cash flows
(discounted at 8%); and
(b) an equity component equal to the residual (representing the conversion option).
In addition, consider the following subsequent scenario:
Additional Scenario (Part d): Modification of Settlement Terms
On 1 January 2025, due to changing market conditions, Stellar Limited modifies the terms
of the convertible bonds so that the conversion option becomes cash-settled rather than by
issuance of shares. At 31 December 2024, the carrying amounts were as follows:
• Liability component (amortised cost): N$928,641
• Equity component: N$103, 110
Thus, the total carrying amount of the compound instrument is N$1,031,751.
At the date of modification, the fair value of the entire instrument is determined to be
N$950,000.
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Required:
a) Calculate the amounts allocated at initial recognition to the liability and equity
components. Show your workings.
(8 marks)
b) Prepare an amortisation schedule for the liability component for the period from 1
January 2024 to 31 December 2024 using the effective interest method. Based on your
schedule, prepare the journal entry to record the interest expense for 2024.
(8 marks)
c) Discuss the subsequent measurement of the equity component of the convertible
bonds under IFRS 9, particularly if, by 31 December 2024, market conditions indicate that
bondholders are likely to convert.
(4 marks)
d) Modification Scenario:
On 1 January 2025, Stellar Limited modifies the convertible bonds so that the conversion
option is now cash-settled. Under IFRS 9, this change requires that the compound
instrument be reclassified as a cash-settled financial liability measured at fair value through
profit or loss.
(i) Explain the accounting implications of this modification.
(ii) Prepare the necessary journal entries to reclassify the instrument.
(10 marks)
END OF QUESTION PAPER
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