MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

MASTER OF COMMERCE DEGREE

LEVEL 1 SEMESTER 1

EXAMINATION QUESTION PAPER

MODULE CODE MAAC503/MPAC523

MODULE NARRATION APPLIED FINANCIAL REPORTING &

REGULATIONS/ADVANCED ACCOUNTING &
FINANCIAL REPORTING

DATE

DURATION 4 HOURS

INSTRUCTIONS TO CANDIDATES:

1. Attempt all questions.

2. Use non-programmable scientific calculator.

3. Start new question on a fresh page.

Question 1
Alice Limited           $000 $000
Trial balance on 31 December 2019         Notes    
            Dr. Cr
            $ $
Sales revenue         1   236200
Purchases           127850  
Loan note interest paid           2400  
Operating expenses           12400  
Preference dividend           1000  
Land and buildings at valuation         2 130000  
Plant and equipment at cost           84300  
Software- cost 1 January 2016           10000  
Stock market investments-Valuation 1 Jan 2019     3 12000  
Depreciation 1 January 2019 plant and equipment       24300
Depreciation 1 January 2019 – software             6000
Loss incurred due to fraud         4 32000  
Trade receivables           23000  
Inventory 1 January 2019           19450  
Bank             350
Trade payables             15200
Ordinary shares of 25 cents each             60000
10% Preference shares             20000
12% Loan note (issued 1 April 2019)             40000
Deferred tax             3000
Revaluation reserve (land and buildings & investments)     45000
Retained earnings 1 January 2019             4350
            454400 454400

The following notes are relevant:

(i) Sales revenue includes $8 million for goods sold in December 2019 for cash to Agric, a
merchant bank. The cost of these goods was $6 million. Agric has the option to require
Alice to repurchase these goods within one month of the year-end at their original selling
price plus a facilitation fee of $250 000.

The inventory at 31 December 2019 was accounted at a cost of $8.5 million. This includes
$500 000 of slow moving inventory that is expected to be sold for a net $300 000.

(ii) Non-current assets

 On 1 January 2019 Alice Limited revalued its land and buildings. The details are as follows:
Cost Valuation
1 January 2013 1 January 2019
Land $20 000 000 $25 000 000
Building $80 000 000 $105 000 000

The building had an estimated life of 40 years when it was acquired and this has not
changed as a result of the revaluation. Depreciation is on a straight-line basis. The surplus
on the revaluation has been added to the revaluation reserve, but no other movements
on the revaluation reserve have been recorded
Plant and equipment is depreciated at 20% per annum on the reducing balance basis.
Software is depreciated by the sum of digits method over a five-year life.
(iii) The investment represents 7.5% of the ordinary shares of Shacks Limited. Alice has a
policy of revaluing its investments at their market price at each year-end. The auditors
have agreed that the changes in value can be taken to the revaluation reserve which on 1
January 2019 contained a surplus of $5 million for the previous revaluations of the
investments. The stock market price of Shacks ordinary shares was $2.50 on 1 January
2019 and by 31 December 2019 this had fallen to $2.25.
(iv) Loss incurred due to fraud
A senior employee of the company who left in October 2018, had diverted investment
funds into his private bank account. The fraud was discovered by the employee’s
replacement in January 2019. It is unlikely that any of the funds will be recovered. Alice
has now implemented tighter procedures to prevent such a fraud recurring. The company
has been advised that this loss will not qualify for any tax relief.
(v) Taxation
The directors have estimated the provision of corporate tax for the year to 31 December
2019 at $11.3 million. The deferred tax provision at 31 December 2019 is to be adjusted
to reflect the tax base of the company’s net assets being $16 million less than the
carrying values. The rate of income tax is 30%. The movement of the deferred tax should
be charged to the income statement.

(vi) Dividends
The directors have declared a final ordinary dividend of 3 cents per share on 20
 December 2019.
Required:
In accordance with International Accounting Standards and International Financial Reporting
Standards as far as the information permits prepare:
(a) Income statement for Alice Limited for the year ended 31 December 2019. ( 12 marks)
(b) The statement of changes in equity and reserves for the year ended 31 December 2019.
(10 marks)
(c) The statement of financial position as at 31 December 2019. (18 marks)
[Total 40 marks]

Question 2

Paragon Limited
Statement of profit or loss and other comprehensive income
for the year ended 31 December 2019
              $000
Revenue             7482
Cost of sales             -4284
Gross profit             3198
Operating expenses     -1479
Interest expense             -260
Investment income             120
Profit before taxation     1579
Income tax             -520
profit for the period     1059
             

Paragon Limited              
Statement of financial position as at 31 December 2019
          Notes 2018 2019
            $000 $000
ASSETS              
Non-current assets              
Property, plant and equipment           3020 3568
Accumulated depreciation           -1112 -1224
Carrying amount           1908 2344
Investment           0 690
            1908 3034
Current assets              
Inventories           785 1046
Trade receivables           824 935
Short term treasury bills           50 120
Bank           122 0
            3689 5135
EQUITY AND LIABILITIES              
Equity share capital_ $1 each           1000 1400
Share premium           60 460
Revaluation reserve           40 90
Opening retained income           147 192
Net profit for the period           65 1059
Dividends declared           -20 -180
Shareholders' equity and reserves           1292 3021
               
Non-current liabilities              
Government grants           200 275
Deferred tax           400 439
10% Convertible loan stock           400 0
               
Current liabilities              
Trade payables           760 644
Dividend payable           20 180
Accrued interest           25 40
Provision for negligence claim           120 0
Government grants           125 100
Bank overdraft           0 136
Income tax payable           367 480
Total equity and liabilities           3689 5135

Notes to financial statements

1. Non-current assets 2018 2019
Land and buildings           1800 2000
Accumulated depreciation           -680 -760
Carrying amount           1120 1240
 Plant           1220 1568
Accumulated depreciation           -432 -464
Carrying amount           1908 2344

On 1 January 2019 Paragon recorded an increase in the value of its land of $150 000.
During the year an item of plant that had a cost of $500 000 and accumulated
depreciation of $244 000 was sold at a loss ( included in cost of sales) of $86 000
on its carrying amount.

2. Government grant
A credit of $125 000 for the current year’s amortisation of the government grants has been
included in cost of sales.

3. Share capital and loan stocks

The increase in the share capital during the year was due to the following events:
(i) On 1 March 2019 there was a bonus issue (out of revaluation reserve) of one bonus
share for every 10 shares held.
(ii) On 1 June 2019 the 10% convertible loan stock holders exercised their right to convert
to ordinary shares. The terms of conversion were 25 ordinary share of $1 each for each
$100 of 10% convertible loan stock.
(iii) The remaining increase in the ordinary shares was due to a stock market placement of
shares for cash on 12 November 2019.
4. Provision for negligence
In September 2019 Paragon made an out of court settlement of a negligence claim brought
about by a former employee. The dispute has been in progress for two years and Paragon had
made provisions for the potential liability in each of the two previous years. The un provided
amount of the claim at the time of settlement was $30 000 and this was charged to operating
expenses.

Required

Prepare a cash flow statement for Paragon Limited for the year ended 31 December 2019, use the direct
method.

[30 marks]

Question 3 (a)

On 31 March 2019, an entity with a June 30 financial year end decided to dispose of an individual asset
which was correctly classified as held for sale and had a carrying amount of $7 500 000.
 This recorded amount incorporates the following: original cost $13 900 000, accumulated depreciation $4
300 000 and previously recognised impairment losses of $2 100 000. The asset’s estimated fair value
less costs to sell when it was classified as held for sale was $6 800 000.

On 30 June 2019, the asset was re-measured, and its fair value less costs to sell was estimated at $ 9 500
000

REQUIRED
Calculate the amounts which should be recognised in the entity's financial statements in relation to the
asset.
(1) In the statement of profit or loss and other comprehensive income on 31/3/2019 and 30/6/2019.
(9 marks)
(2) In the statement of financial position as at 31/3/2019 and 30/6/2019. (6 marks)

Question 3 (b)

Chatira Limited bought a machine on 1 January 2019 for cash. The following details relate to the asset:

$
Purchase price 4500000
Delivery costs 135000
installation costs 270000
General administration costs 45000
Pre-production costs 315000
Initial operating losses 450000

Additional information
1. The administration costs are of a general and indirect nature.
2. The pre-production costs were necessary to bring the machine to the desired working
condition.
3. The initial operating losses are attributable to the production of small quantities when the
machine was first put into use.
4. The machine was put into use on the date of acquisition.
5. The machine is depreciated using the straight line method, based on a useful life of 10
years and has a residual value of $1 300 000.
REQUIRED
a) Calculate the cost price at which the asset should be recognised. (8 marks)
b) Calculate the asset's carrying amount as at 31 December 2019. (7 marks)
[Total 30 marks]

THE END