ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

LICENTIATE LEVEL
L 1: Financial Reporting
June 2010
December 2010
June 2011

QUESTION PAPERS AND SUGGESTED SOLUTIONS

 Table of Contents

JUNE 2010 FINANCIAL REPORTING................................................................. 3

SUGGESTED SOLUTIONS............................................................ 15

DECEMBER 2010 FINANCIAL REPORTING............................................................... 31

SUGGESTED SOLUTIONS............................................................ 43

JUNE 2011 FINANCIAL REPORTING............................................................... 62

SUGGESTED SOLUTIONS............................................................ 74

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 ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL
L1: FINANCIAL REPORTING

SERIES: JUNE 2010

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) 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: Attempt this ONE question.
Section B: Attempt THREE questions only.
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. 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.
6. All workings must be done in the answer booklet.
7. Present legible and tidy work.
8. Graph paper (if required) is provided at the end of the answer booklet.

3
SECTION A
(This question is compulsory and must be attempted)
Question 1
Muko Plc, listed on its local stock exchange, is a retail organization operating several retail outlets
countrywide. A reorganization of the company was started in 2008 because of significant reduction
in profits. This reorganization was completed during the current financial year.
The trial balance for Muko Plc at 30 September 2009 was as follows:
K'000 K'000
10% debentures 2020 1,000
Administrative expenses 615
Bank and cash 159
Buildings at 30 September 2008 11,200
Cash received on disposal of equipment 11
Cost of sales 3,591
Debenture interest paid – half year to 31 March 2009 50
Trade receivables 852
Distribution costs 314
Furniture and fixtures at 30 September 2008 2,625
Investment properties at market value 30 September 2008 492
Dividends paid 1,600
Rental income received 37
Ordinary shares of K1 each, fully paid at 30 September 2009 4,000
Retained earnings at 30 September 2008 1,390
Deferred tax liability 256
Provision for reorganization expenses at 30 September 2008 1,010
Accumulated depreciation at 30 September 2008:
Buildings 1,404
Furniture and fixtures 1,741
Reorganization expenses 900
Revaluation surplus 172
Sales 9,415
Share premium 2,388
Inventories at 30 September 2009 822
Trade payables 396
23,220 23,220

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ADDITIONAL INFORMATION PROVIDED:
(i) The reorganization expenses relate to a comprehensive restructuring and reorganization of
the company that began in 2008. Muko Plc's financial statements for 2008 include a
provision for reorganization expenses of K1,010,000. All costs had been incurred by the
year end, but an invoice for K65,000, received on 2 October 2009, remained unpaid and is
not included in the trial balance figures. No further restructuring and reorganization costs
are expected to occur and the provision is no longer required. The decrease/increase
should be taken to profit or loss.
(ii) Investment properties are carried in the financial statements under the fair value of IAS 40.
The market value of the properties at 30 September 2009 was K522,000. There were no
additions or disposals of investment properties held during the year. The decrease/increase
should be taken to profit or loss.
(iii) On 1 November 2009, Muko Plc was informed that one of its credit customers, Dalitso, had
ceased trading. The liquidators advised Muko Plc that it was very unlikely to receive
payment of any of the K45,000 due from Dalitso at 30 September 2009.
(iv) One of Muko Plc's customers is suing the company for damages as a consequence of a
faulty product. Legal advisers are currently advising that the probability of Muko Plc being
found liable is 75%. The amount payable is estimated to be the full amount claimed of
K100,000.
(v) The income tax charge for the year ended 30 September 2009 is estimated at K1,180,000
and the deferred tax liability needs to be adjusted to K281,000 (all movement to profit or
loss).
(vi) The directors paid dividends amounting to 40 ngwee per share during the period.
(vii) During the year, Muko Plc disposed of old equipment for K11,000. The original cost of this
equipment was K210,000 and accumulated depreciation at 30 September 2008 was
K205,000 Muko Plc's accounting policy is to charge no depreciation in the year of disposal.
There were no additions to property, plant and equipment in the year.
(viii) Depreciation is charged to cost of sales using the straight-line basis on property, plant and
equipment as follows:
Buildings 3%
Furniture and fixtures 20%
(ix) On 1 April 2009, Muko Plc made a rights issue of 1 new share for 4 existing shares, at a
price of K3. The rights issue had been fully accounted for by 30 September 2009.
(x) On 30 September 2009, the buildings were revalued to K9,500,000.
Required
Prepare the income statement for Muko Plc for the year to 30 September 2009 and a statement of
financial position (Balance sheet) at that date.

(Total 25 marks)

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SECTION B
(Attempt any three questions in this section)
Question 2
On 1 August 2007 Puku purchased 18 million of a total of 24 million equity shares in Sable.
The acquisition was through a share exchange of two shares in Puku for every three
shares in Sable. Both companies have shares with a par value of K1 each. The market
price of Puku’s shares at 1 August 2007 was K5·75 per share. Puku also paid cash of
K2·42 per acquired share of Sable. The reserves of Sable on 1 April 2007 were K69
million. Puku has held an investment of 30% of the equity shares in Antelope for many
years.

The summarized income statements for the three companies for the year ended 31 March 2008
are:

Puku Sable Antelope

K’000 K’000 K’000
Revenue 150,000 78,000 80,000
Cost of sales (94,000) (51,000) (60,000)
Gross profit 56,000 27,000 20,000
Distribution costs (7,400) (3,000) (3,500)
Administrative expenses (12,500) (6,000 (6,500)
Finance costs (note (ii)) (2,000) (900) nil
Profit before tax 34,100 17,100 10,000
Income tax expense (10,400) (3,600) (4,000)
Profit for the period 23,700 13,500 6,000
THE FOLLOWING INFORMATION IS RELEVANT:
(i) The fair values of the net assets of Sable at the date of acquisition were equal to their
carrying amounts with the exception of property and plant. Property and plant had fair
values of K4·1 million and K2·4 million respectively in excess of their carrying amounts. The
increase in the fair value of the property would create additional depreciation of K200,000 in
the consolidated financial statements in the post acquisition period to 31 March 2008 and
the plant had a remaining life of four years (straight-line depreciation) at the date of
acquisition of Sable. All depreciation is treated as part of cost of sales.

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The fair values have not been reflected in Sable’s financial statements. No fair value
adjustments were required on the acquisition of Antelope.

(ii) Prior to its acquisition, Sable had been a good customer of Puku. In the year to 31 March
2008, Puku sold goods to Sable at a selling price of K10 million. Puku made a profit of 20%
on the cost of these sales. At 31 March 2008 Sable still held inventory of K3 million (at cost
to Sable) of goods purchased in the post acquisition period from Puku.
(iii) An impairment test on the goodwill of Sable conducted on 31 March 2008 concluded that it
should be written down by K2 million. The value of the investment in Antelope was not
impaired.
(iv) All items in the above income statements are deemed to accrue evenly over the year.
(v) Ignore deferred tax.
Required:
(a) Calculate the goodwill arising on the acquisition of Sable at 1 August 2007. (6 marks)
(b) Prepare the consolidated income statement for the Puku Group for the year ended
31 March 2008.
Note: assume that the investment in Antelope has been accounted for using the equity
method since its acquisition. (15 marks)

(c) At 31 March 2008 the other equity shares (70%) in Antelope were owned by many separate
investors. Shortly after this date Eland (a company unrelated to Puku) accumulated a 60%
interest in Antelope by buying shares from the other shareholders. In May 2008 a meeting
of the board of directors of Antelope was held at which Puku lost its seat on Antelope’s
board.
Required:
Explain, with reasons, the accounting treatment Puku should adopt for its investment in Antelope
when it prepares its financial statements for the year ending 31 March 2009. (4 marks)

(Total 25 marks)

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Question 3
The financial statements for Chimwemwe Plc for the year ended 31 March 2008 are as follows:

Statement of Comprehensive Income for the year ended 31 March 2008

K’000
Revenue 20,000
COS (14,200)
Gross profit 5,800
Operating expenses (2,048)
Profit from operations 3,752
Interest receivable 100
Interest payable (640)
Profit before tax 3,212
Tax (1,300)
Profit for the year 1,912
Other comprehensive income:
Gain on land revaluation 2,000
Total comprehensive income 3,192
Statement of Changes in Equity for the year ended 31 March 2008

Share Share Revaluation Retained

capital premium premium earnings Total
K’000 K’000 K’000 K’000 K’000
Balance at 1 April 2007 4,000 1,200 – 1,108 6,308
Profit for year 1,912 1912
Share issue 2,000 516 2,516
Dividend paid (800) (800)
Revaluation 2,000 2,000
Balance at 31 March 2008 6,000 1,716 2,000 2,220 11,936

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The following information may also be relevant:
(1) Non-current assets
2008 2007
Cost Depreciation Cost Depreciation
K’000 K’000 K’000 K’000
Intangibles 1,400 800 800 400
Property, plant and 10,000 3,100 6,000 2,800
equipment

(2) At 1 April 2007, freehold land was revalued from K2,000,000 to K4,000,000.
(3) During the year, plant and machinery which had cost K1,200,000 and had a carrying
amount of K200,000 was sold for K500,000.
(4) Development costs of K600,000 were capitalised during the year as the recognition criteria
per IAS 38 were met.
(5) Part of the loan notes had reached their redemption period during the year and were repaid
accordingly.
(6) Ordinary shares were issued for cash during the year.
(7) Current asset investments at 1 April 2007 were sold during the year for K188,000.
These had never been classed as a cash equivalent. The profit or loss on disposal was included in
operating expenses.
Required:
(a) Prepare a statement of cash flow for Chimwemwe plc for the year ended 31 March 2008
which meets the requirements of IAS 7 Statement of Cash Flows, using the indirect method.
(18 marks)
(b) Comment on the changes in cash flow and financial position of Chimwemwe during the year
using the information given in the question and the statement of cash flow calculated at part
(a). (7 marks)
(Total 25 marks)

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Question 4

Mzilikazi and his son Lobengula have been in partnership for a number of years and share profits
(and losses) in the ratio 2:1. However, on 1 June 2006 they decide to dissolve their partnership to
pursue other interests. The statement of Financial position of the partnership at 31 May 2006 is
given below:
Mzilikazi and Lobengula Partnership
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) AS AT 31 MAY 2006
K’000 K’000

Non-current assets at NBV

Equipment 4,000
Motor vehicles 6,000
10,000
Current assets
Investments 10,000
Receivables 14,000
Bank 500
24,500
34,500
Capital accounts
Mzilikazi 10,000
Lobengula 7,000
17,000
Current accounts
Mzilikazi 4,000
Lobengula 2,500
6,500
Payables 10,000
Loan from Zwide 1,000
34,500

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At dissolution, it was agreed by the partners that Lobengula could take some equipment, which had
a net book value of K500,000 at a valuation of K750,000. It was also agreed that Mzilikazi will take
over responsibility for the loan from Zwide. Other equipment was sold for K3, 300,000. All vehicles
were sold for a total of K5,500,000. The receivables (debtors) only realised K11,300,000, and the
payables were settled for K9,000,000. The partners’ investments realised K13,400,000 and there
were dissolution expenses of K800,000.
Required

Show the relevant accounts and the final distribution between partners after the dissolution of the
partnership.
(Total 25 marks)

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Question 5
As at 31 May 2008 the following trial balances were extracted at the head office and branch of
Mweruwantipa Ltd.
HEAD OFFICE
Debit Credit
K’000 K’000
Non current assets Nil
Retained earnings 25,800
Current accounts 60,500
Stock at cost or mark-up at 1 June 2007 48,500
Purchases/sales 255,000 229,700
Expenses 46,900
Provision for unrealised profit 1,400
Goods sent to branch 154,000
410,900 410,900
BRANCH
Debit Credit
K’000 K’000
Non current assets 74,200
Retained earnings Nil
Current accounts 51,500
Stock at cost or mark-up at 1 June 2007 15,400
Purchases/sales 148,500 199,700
Expenses 13,100
251,200 251,200
ADDITIONAL INFORMATION:
(a) All goods sold by the branch are supplied from head office at cost plus 10%. At 31 May
2008 goods valued at K 5,500,000 were in transit to the branch.
(b) The branch deposited K3,000,000 on behalf of the head office in the bank on 31 May 2008.
No record of this transaction has been made in the head office books.
(c) Inventory at 31 May 2008, excluding goods in transit, were as follows:
Head office at cost K 54,500,000
Branch at mark-up K 17, 600,000

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(d) Head office has recharged the branch with K 500,000 of expenses. The invoice for these
expenses had not yet reached the branch at 31 May 2008.
Required:
Prepare the Income statement and Statement of financial position (Balance Sheet) as at 31 May
2008 for the Head office, branch, and the Combined entity of Mweruwantipa Ltd.
(Total 25 marks)

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Question 6

IAS 38 Intangible Assets defines the difference between research expenditure and development
expenditure. IAS 38 also lays down rules which must be applied to the capitalisation of research
and development expenditure.
Required:
(a) Explain the meaning of the terms research expenditure and development expenditure.
(3 marks)
(b) Explain the criteria applied to research and development expenditure, according to IAS 38,
to determine whether the cost should be capitalized. (8 marks)
(c) Discuss briefly why there was a need for an accounting standard relating to research and
development expenditure. (4 marks)
(d) Sekeletu, a listed company, is a large paper-manufacturing enterprise. The company’s
finance director is working on the published accounts for the year ended 31 March 2009.
The chief accountant has prepared the following list of problems which will have to be
resolved before the statements can be finalised.
(i) The company paid the engineering department at Kololo University a large sum of
money to design a new pulping process which will enable the use of cheaper raw
materials. This process has been successfully tested in the University's laboratories
and is almost certain to be introduced at Sekeletu's pulping plant within the next few
months. (5 marks)
(ii) The company paid a substantial amount to the University's biology department to
develop a new species of tree which could grow more quickly and therefore enable
the company's forests to generate more wood for paper manufacturing. The project
met with some success in that a new tree was developed. Unfortunately, it was prone
to disease and the cost of the chemical sprays needed to keep the wood healthy
rendered the tree uneconomic. (5 marks)
Required:
Explain how each of these matters should be dealt with in the published accounts for the year
ended 31 March 2009 in the light of IAS 38 Intangible Assets. You should assume the amounts
involved are material in every case.

(Total 25 Marks)

END OF PAPER

14
 JUNE 2010
L1: FINANCIAL REPORTING
SUGGESTED SOLUTIONS

15
Solution 1
(a) MUKO PLC – INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2009
K'000 K’000
Revenue 9,415
Cost of sales (3,591 + 819) (4,410)
Gross profit 5,005
Distribution costs (314)
Administrative expenses (W1) (760)
Finance costs (W3) (100)
Restructuring provision reversed
unused ((900 + 65) – 1,010) 45
Fair value gain on investment properties (W5) 30
Profit on disposal of equipment (W6) 6
Rental income 37 118
Profit before tax 3,949
Income tax expense (1,180 + 25) (1,205)
PROFIT FOR THE YEAR 2,744

MUKO PLC - STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2009

K'000 K’000
Non-current assets
Property, plant and equipment (W2) 9,896
Investment properties (W5) 522
10,418
Current assets
Inventories 822
Trade receivables (852 – 45) 807
Cash 159
1,788
12,206
Equity
Share capital 4,000
Share premium 2,388

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Retained earnings (1,390 + 2,744 – 1,600) 2,534
Revaluation surplus (172 + (W2) 40) 212
9,134
Non-current liabilities
10% debentures 20Y0 1,000
Deferred tax liability (W4) 281
Provisions 100
1,381
Current liabilities
Trade payables 396
Income tax payable 1,180
Interest payable (W3) 50
Other payables 65
1,691
12,206
Workings
1 Administrative expenses
K’000 K'000
As per TB 615
Bad debt written off – Dalitso * 45
Provision for legal claim re faulty product ** 100 145
760
* Adjusting event – provides additional evidence of conditions existing at the end of the
reporting period as per IAS 10.
** The obligation appears to be probable rather than possible. Hence treated as a
provision rather than disclosed as a contingent liability as per IAS 37.
2 Property, plant and equipment
Buildings Plant & equip. Total
K’000 K’000 K’000
Cost b/d 11,200 2,625 13,825
Accumulated dep'n b/d (1,404) (1,741) (3,145)
9,796 884 10,860
Additions – –

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 Disposals (NBV) (210 – 205) (5) (5)
Dep'n charge for year
• 11,200 × 3% (336) (336) (819)
• (2,625 – 210) × 20% (483) (483)
9,460 396 9,856
Revaluation (Bal.fig) 40 – 40
Net book value 9,500 396 9,896
3 Debenture interest
K'000
Per TB – ½ year 50
Accruals – further ½ year 50
P/L charge for year 100
4 Deferred tax liability
K'000
As per TB 256
increase for year 25
Amount required for statement of
financial position 281
5 Investment properties
K'000
Opening valuation 492
Increase in value 30
Closing valuation 522
6 Disposals account
K'000
Cost of asset sold 210
Depreciation thereon (205)
Book value 5
Proceeds 11
Profit on disposal 6

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Solution 2
1 (a) Cost of control in Sable: K’000 K’000
Consideration
Shares (18,000  2/3  K5·75) 69,000
Cash payment (18,000  2·42) 43,560
112,560
Less
Equity shares 24,000
Pre-acquisition reserves:
At 1 April 2007 69,000
To date of acquisition (13,500  4/12) 4,500
Fair value adjustments (4,100 + 2,400) 6,500
104,000  75% * 104,000 (78,000)
Goodwill 34,560
* The acquisition of 18 million out of a total of 24 million equity shares is a 75%
interest.
(b) Puku Group
Consolidated income statement for the year ended 31 March 2008
K’000
Revenue (150,000 + (78,000 x 8/12) – (10,000 intra group)) 192,000
Cost of sales (w (i)) (119,100)
Gross profit 72,900
Distribution costs (7,400 + (3,000 x 8/12)) (9,400)
Administrative expenses (12,500 + (6,000 x 8/12)) (16,500)
Finance costs (w (ii)) (2,600)
Impairment of goodwill (2,000)
Share of profit from associate (6,000 x 30%) 1,800
Profit before tax 44,200
Income tax expense (10,400 + (3,600 x 8/12)) (12,800)
Profit for the year 31,400
Attributable to:
Owners of the parent 29,300
Non-controlling interests (w (iii)) 2,100
31,400

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(c) An associate is defined by IAS 28 Investments in Associates as an investment over which an
investor has significant influence. There are several indicators of significant influence, but the
most important are usually considered to be a holding of 20% or more of the voting shares
and board representation. Therefore it was reasonable to assume that the investment in
Antelope (at 31 March 2008) represented an associate and was correctly accounted for
under the equity accounting method.
The current position (from May 2008) is that although Puku still owns 30% of Antelope’s
shares, Antelope has become a subsidiary of Eland as it has acquired 60% of Antelope’s
shares. Antelope is now under the control of Eland (part of the definition of being a
subsidiary), therefore it is difficult to see how Puku can now exert significant influence over
Antelope. The fact that Puku has lost its seat on Antelope’s board seems to reinforce this
point. In these circumstances the investment in Antelope falls to be treated under IAS 39
Financial Instruments: Recognition and Measurement. It will cease to be equity accounted
from the date of loss of significant influence. Its carrying amount at that date will be its initial
recognition value under IAS 39 and thereafter it will be carried at fair value.
Workings
(i) Cost of sales K’000 K’000
Puku 94,000
Sable (51,000  8/12) 34,000
Intra group purchases (10,000) (10,000)
Additional depreciation: plant
(2,400/ 4 years  8/12) 400
property (per question) 200
600
Unrealised profit in inventories (3,000  20/120) 500
119,100

Note: for both sales revenues and cost of sales, only the post acquisition intra group
trading should be eliminated.
(ii) Finance costs
K’000
Puku per question 2,000
Sable (900  8/12) 600
2,600

20
(iii) Non-controlling interests (Minority interests)
Sable’s post acquisition profit (13,500  8/12) 9,000
Less post acquisition additional
depreciation (w (i)) (600)
8,400 × 25% = 2,100

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Solution 3

(a) Statement of Cash flows for Chimwemwe plc for the year ended 31 March 2008
Cash flows from operating activities
K’000 K’000
Profit before tax 3,212
Adjustment for:
Depreciation (W2) 1,300
Amortisation (400+600-600) 400
Profit on disposal of PPE (500-200) (300)
Interest expense 640
Interest receivable (100)
Operating profit before working capital changes 5,152
Working capital changes 0
Cash generated from operations 5,152
Interest paid (640)
Tax paid (1,300)
Net Cash from operating activities 3,212
Cash flows from investing activities
Purchase of intangibles(1,400-800) (600)
Purchase of Property,
Plant and Equipment (W1) (3,200)
Proceeds of sale of property, Plant and
Equipment 500
Purchase of non-current asset investments
(800-400) (400)
Proceeds of sale of current asset investments 188
Interest received 100
Net cash used in investing activities (3,412)
Cash flows from financing activities
Issue of shares (6,000-4,000)+(1,716-1,200) 2,516
Dividend paid (800)
Net Cash from operating activities 1,716
Increase in cash and cash equivalent 1,516
Cash and cash equivalents at 1 April 2007 0
Cash and Cash equivalents at 31 March 2008 1,516

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Workings
(1) P, P & E © NBV
K’000 K’000
Bal b/d 6,000 Disposal 1,200
Revaluation 2,000
Purchase (Bal figure) 3,200 Bal C/d 10,200
11,200 11,200

(2) Accumulate Dep on P, P & E

K’000 K’000
Bal b/d 2,800
Depreciations on Depreciation for the
disposed asset 1,000 year Bal. figure 1,300
C/d 3,100
4,100 4,100

(b) Changes in cash flow and position

During the year cash has increased from zero to K1,516,000.Chimwemwe is reporting a
profit from operations during the year which according to the cash flow statement is backed
by operating cash. Chimwemwe seems to be carrying transactions on cash basis as net
profit is equal to net cash from operating activities.

Other things to note

The business had no inventories, no receivables and payables. IT system may have been in
use. If this is not the case, further information would be required surrounding this working
capital.

A huge drain on cash during the year can be seen when looking at investing activities
section. Intangible assets, investment and plant and equipment have been purchased part of
the purchase was financed by sale of property, plant and equipment and current
investments. Current investments were sold an Net book value.

23
This resulted into net cash outflow of K3,412,000.This huge drain on cash now will have a
positive impact on performance in the future.

Cash has also been raised through an issue of shares which is a positive sign as investors
are still willing to invest in the business. However, shareholders are demanding so equity
finance is often seen as being more expensive than debt finance. Furthermore, from cash
flow point of view, interest payments are tax deductible where as dividends are not.

Conclusion
During the current year activities had a favorable effect on cash. The major drain was from
investing activities. Further more, a substantial dividend has been paid during the year which
was sufficiently covered by operating cash.

24
Solution 4
Realisation account
K’000 K’000
Equipment (NBV) 4,000 Payables 10,000
Motor vehicles (NBV) 6,000 Loan from Zwide 1,000
Investments 10,000 Cash and bank proceeds
Receivables 14,000 Equipment 3,300
Cash and bank payments: Motor vehicles 5,500
Payables settled 9,000 Receivables 11,300
Dissolution expenses 800 Investments 13,400
Mzilikazi’s a/c (Zwide Loan) 1,000 Lobengula’s account
Profit on realization (Equipment) 750
Mzilikazi:2/3 300
Lobengula 1/3 150
45,250 45,250

Partnership capital accounts

Mzilikazi Lobengula Mzilikazi Lobengula
K’000 K’000 K’000 K’000
Realisation a/c Capital accounts
(equip) 750 Balance b/f 10,000 7,000
Cash 15,300 8,900 Current accounts
Balance b/f 4,000 2,500
Loan from Zwide 1,000
Realisation a/c 300 150
15,300 9,650 15,300 9,650
 Cash and bank
K’000 K’000
Balance b/f 500 Realisation account:
Equipment 3,300 Payables settled 9,000
Motor vehicles 5,500 Dissolution expenses 800
Receivables 11,300 Partners’ accounts:
Investments 13,400 Mzilikazi 15,300
Lobengula 8,900
34,000 34,000

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Solution 5
Income statements for the year ended 31 May 2008
Head Combined
office Branch entity
K’000 K’000 K’000

Sales 229,700 199,700 429,400

Transfers to branch 154,000
Opening Inventory (48,500) (15,400) (62,500)
Purchases (255,000) (255,000)
Transfers from head office (148,500)
Closing inventory 54,500 17,600 75,500
Gross profit 134,700 53,400 187,400
Expenses (46,900) (13,100) (60,500)
Expenses re-charged (500)
Increase in provision for unrealised profit (700)
87,100 39,800 126,900
Transfer of profit to head office 39,800 (39,800) –
126,900 – 126,900

Statements of financial position as at 31 May 2008

Head Combined
office Branch entity
K’000 K’000 K’000

Non current assets 74,200 74,200

Inventory 54,500 17,600 75,500
Goods in transit (5,500 -500) 5000
Cash 3,000
Cash in transit 3,000
Current account (91,800 – 1600) 90,200
Current account (91,800)
152,700 – 152,700
Retained earnings
Balance b/f 25,800 – 25,800
Profit for the period 126,900 – 126,900
152,700 – 152,700

27
Workings:

(1) Head office books

Current account with branch

K’000 K’000
Balance b/f 60,500 Goods in transit 5,500
Profit 39,800 Cash in transit 3,000
Balance c/d 91,800
100,300 100,300
(2) Branch books

Current account with head office

K’000 K’000
Balance c/d 91,800 Balance b/d 51,500
Profit Expense recharge 500
Profit 39,800
Motor vehicles 91,800 91,800

(3) Unrealised profit

Provision for unrealised profit

K’000 K’000
Balance c/d: Balance b/d 1,400
Goods in transit Increased in provision
(5,500 × 10/110) 500 during the year 700
Stocks at branch 1,600
2,100 2,100

28
Solution 6
(a) AS 38 Intangible Assets defines research and development expenditure as follows:
Research: original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
Development: the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services prior to the commencement of commercial production or use.
(b) Apart from the cost of non-current assets acquired or constructed in order to provide facilities for
research and development activities over a number of accounting periods, IAS 38 requires
development expenditure to be capitalised provided an entity can demonstrate all of the following:
(i) the technical feasibility of the project
(ii) the intention to complete the project and use or sell it
(iii) the ability to use or sell the item
(iv) how the project will generate probable future economic benefits
(v) the availability of adequate technical, financial and other resources to complete the project.
(vi) the ability to measure the expenditure reliably.
(c) The need for an accounting standard with respect to expenditure on research and development
arose from a number of factors. Firstly in many instances the sums expended were of a substantial
nature and their treatment in the financial statements could have a material effect on the view
shown by such statements. In many instances companies with substantial research and
development expenditure shown on their statement of financial position had failed to survive in
order to complete the projects involved.
The second effect of capitalising research and development expenditure is to apparently

'improve' the reported profits and earnings of those companies adopting this treatment. Thirdly the
disclosure of the total amount expended and/or written off in an accounting period will enable
users to assess the company's investment in the future.
Fourthly, the immediate write off of expenditure on the development of commercially successful
products leads to the short term understatement of both profit and assets.
(d) IAS 38 Intangible Assets splits research and development expenditure into two categories:
Research expenditure and development expenditure. Research expenditure should be written off
as incurred; development expenditure should be carried forward as an asset if all of the following
can be demonstrated:
(i) the technical feasibility of the project;
(ii) the intention to complete the project and use or sell it;
(iii) the ability to use or sell the item;

29
 (iv) how the project will generate probable future economic benefits;
(v) the availability of adequate technical, financial and other resources to complete the project;
(vi) the ability to measure the expenditure reliably.
(e) The new pulping process does seem to satisfy the conditions listed above, so the costs to date
should be carried forward in the statement of financial position as an intangible non-current asset.
(f) The attempt to develop a new species of tree definitely fails to satisfy the conditions listed above. It
is not commercially viable and may not overall recover its costs, so expenditures on the project
should be written off as incurred. There is no option to defer any of the related costs to future
accounting periods.

30
 ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL
L1: FINANCIAL REPORTING

SERIES: DECEMBER 2010

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) 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: Attempt this ONE question.
Section B: Attempt THREE questions only.
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. 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.
6. All workings must be done in the answer booklet.
7. Present legible and tidy work.
8. Graph paper (if required) is provided at the end of the answer booklet.

31
SECTION A:
Attempt this compulsory question in this section.
Question 1
(a) IAS 28: Investment in Associates prescribes the accounting of investments in associates.
Required:
Explain what an associate investment is and state how it is accounted for under IAS 28: Investment
in Associates. (3 marks)
(b) You have been presented with the following draft Statements of Financial Position for three
entities: P, S and A:

Draft Statements of Financial Position as at 31st December 2009

P Co S Co A Co
K’000 K’000 K’000
Assets
Non-current Assets
Property, Plant and Equipment 160,000 192,000 139,760
Investments 332,000  
Total Non-current Assets 492,000 192,000 139,760
Current Assets
Inventory 22,000 48,000 34,772
Current Account with S 32,000  
Trade Receivables 78,000 44,000 40,424
Cash and Cash Equivalents 4,000 12,000 12,132
Total Assets 628,000 296,000 227,088
Equity and Liabilities
Equity Shares of K1 each 400,000 160,000 80,000
Retained Earnings 84,000 52,000 31,200
484,000 212,000 111,200
Non-current Liabilities
12% Loan Notes 104,000 40,000 40,000
Current Liabilities
Trade Payables 40,000 20,000 75,888
Current Account with P  24,000 
Total Equity and Liabilities 628,000 296,000 227,088

32
 The following information is relevant:
(i) On 1st January 2009, P acquired 128 million equity shares of S for K240 million. At the date
of acquisition, S’s retained earnings were K25.6 million. On the same date, P issued 12%
loan notes to S, redeemable in 5 years time.
P also purchased 32 million shares of A’s equity shares for K52 million; when A’s retained
earnings were K84 million.
(ii) At the time of P’s acquisition of S, the fair value of S’s property, plant and equipment
exceeded book values by K4 million, attributable to buildings. The said buildings had a
remaining life of 20 years at the time.
(iii) Loan interest due at 31st December 2009 was K1 million. Both P and S had accrued this
amount at year end.
(iv) On 27th December 2009, S had sent a cheque to P for K8 million. P only received this
cheque on 5th January 2010.
(v) During the year, P sold goods to S for K16 million at a mark-up of one-third. All these goods
were unsold by year-end and the invoice for the same remained unpaid on 31st December
2009.
(vi) Non Controlling Interest is valued using the proportion of net assets method.
(vii) At 31st December 2009, goodwill in S was impaired by K37,920,000.00; while there was no
goodwill impairment in A.
Required:
Prepare a Consolidated Statement of Financial Position for P Group as at 31st December 2009, in
accordance with requirements of International Financial Reporting Standards (IFRSs).
[Notes to accounts are not required, but all workings should be clearly shown and appropriately
referenced]. (22 marks)
[Total: 25 marks]

33
SECTION B:
Attempt any Three (3) questions in this section.
Question 2
The trial balance below was extracted from PROFED Learning Media (PROFED), an emerging institution
engaged in provision of professional accountancy training in Zambia:
Trial Balance as at 31st December 2009
K’000 K’000
Revenue from tuition fees 458,240
Cost of sales (note 1) 411,060
Loan interest paid 2,500
Distribution expenses 13,600
Administration expenses 96,400
Land and buildings, of which Land K32 million (note 1) 132,000
Equipment (note 1) 60,000
Leased Lecture Theatre 1 Jan. 2009 (note 2) 33,280
Accumulated Depreciation on 1 Jan. 2009:
Buildings 20,000
Equipment 36,000
Equity Shares of 50 Ngwee each at 1 Jan. 2009 48,000
Share Premium at 1 Jan. 2009 9,600
Retained Earnings at 1 Jan. 2009 27,200
10% Loan Notes (note 3) 64,000
10% Redeemable Preference Shares 80,000
Lease rental paid at 1 Jan. 2009 9,600
Income Tax (note 4) 320
Deferred Tax (note 4) 8,960
Inventory (note 6) 1,840
Trade Receivables 26,400
Trade Payables 9,672
Lease Obligations at 1 Jan. 2009 34,560
Suspense Account Balance (note 5) 12,288
Cash and Cash Equivalents 22,160
808,840 808,840

34
 The following information is also made available:
1 On 31st March 2009, PROFED completed building an ultra modern lecture theatre at a total
cost of K350 million, charged to cost of sales. At a joint ceremony to commission the theatre
and celebrate PROFED’s fifth anniversary, an expert advised that the lecture theatre’s
lifespan was 25 years.
Other buildings had an estimated life of 40 years when they were acquired and are being
depreciated on straight-line basis. Equipment is depreciated at 20% per annum using
reducing balance method. PROFED charges depreciation of both buildings and plant to
cost of sales.
2 In order to overcome shortage of classroom accommodation due to high enrolment,
PROFED took a 5-year finance lease of a lecture theatre on 1st January 2008. The cash
price and fair value of this property was K41.6 million. Under terms of this lease, PROFED
was to make annual advance payments of K9.6 million each. The annual interest rate
implicit in the lease is 8%. PROFED’s depreciation policy on plant is 20% per annum on cost.
3 The 10% loan note was issued on 30th June 2009 and is redeemable in 2012.
4 The income tax balance in the trial balance relates to over provision on provisional
corporation tax for year ended 31st December 2008. PROFED estimated that corporation tax
for year ended 31st December 2009 is K14.6 million. Changes in the tax base of PROFED’s
assets led to the deferred tax balance at 31st December 2009 reducing by K1.5 million.
5 The suspense account arose from incorrect double entry accounting for a fully subscribed
rights issue on 31st March 2009. PROFED’s accountant had correctly debited proceeds of
this rights issue in which one share for every five held was issued at a price of 64 Ngwee per
share.
6 Inventory as at 31st December 2009 was correctly valued at K1.84 million. Included in this
amount was a single class of inventory valued at its cost of K368,000 at 31 st December 2009.
Early in January 2010, the whole of this inventory was sold for K320,000 before subtracting
selling costs of K48,000.

Required:
Prepare, in accordance with the requirements of the International Financial Reporting Standards
(IFRSs) PROFED’s,
(i) Income Statement for the year ended 31st December 2009. (10½ marks)
(ii) Statement of Changes in Equity for the year ended 31st December 2009. (3½ marks)
(iii) Statement of Financial Position as at 31st December 2009. (11 marks)
[Notes to accounts are not required, but clearly show all your workings.]
[Total: 25 marks]

35
Question 3
(a) You are presented with the following extracts of financial statements relating to Sangwapo plc:
Income Statement for the year ended 31st December 2009
K’000
Revenue 5,283
Cost of sales and expenses (2,784)
Operating Profit 2,499
Interest Charge (330)
Profit before tax 2,169
Income Tax Expense (720)
Profit for the year 1,449
Statement of Changes in Equity (extract) - year ended 31st December 2009
Rev. Surplus R/Earnings
K’000 K’000
Balance @ 1 Jan 2009 120 3,630
Revaluation of Non-current Assets 330 
Profit for the Year  1449
Dividends  (243)
Balance @ 31 Dec 2009 450 4,836
Statements of Financial Position as at 31st December 2009
2009 2008
K’000 K’000
Assets
Non-current Assets
Intangible Assets (note 1) 4,245 2,451
Tangible Assets (note 2) 2,496 2,043
Total Non-current Assets 6,741 4,494

36
 Current Assets
Inventory 1,857 2,103
Trade Receivables 1,572 1,476
Investments in Treasury Bills (note 3) 96 -
Other Investments (note 3) 1,092 375
Cash and Cash Equivalents 51 243
Total Assets 11,409 8,691
Equity and Liabilities
Equity Shares of K1 each 1,500 900
Share Premium 936 852
Revaluation Surplus 450 120
Retained Earnings 4,836 3,630
7,722 5,502
Non-current Liabilities
5% Loan Notes 660 264
Provision for Court Case 219 150
Current Liabilities
Trade Payables 1,551 1,587
Tax Payable 714 678
Interest Payable 300 90
Dividends Payable 243 420
Total Equity and Liabilities 11,409 8,691
Notes to financial statements:
1 Intangible non-current assets represent deferred development expenditure. Amortisation on
deferred development expenditure in 2009 amounted to K129,000.
2 Additions to tangible non-current assets in the year under review amounted to K600,000. During
the year, Sangwapo plc received K309,000 from sale of a tangible non-current asset, on which a
loss of K18,000 was suffered.
3 Investments in treasury bills are cash equivalents; while other investments are not.

37
Required:
(a) Prepare Sangwapo plc’s Statement of Cash flows for the year ended 31st December 2009, in
accordance with requirements of IAS 7 (Statement of Cash flows). (15 marks)
(b) Identify any five (5) users of Financial Statements that preparers of these statements should
normally have in mind, and state two (2) benefits each of these identified users derive from ratio
analysis. (10 Marks)
[Total: 25 marks]

38
Question 4
(a) Kache Kache Transporters Limited acquired a bus on 1 January 2009 through a 7 year lease
from Institutional Credit Company (ICC), a leasing company. The present value of the minimum
lease payments was K145 million and the fair value of the bus was K140 million.
The expected useful life of the bus was 8 years. According to terms of this lease, Kache Kache
paid a deposit of K3.68 million to be followed by 7 annual instalments of K28 million
payable in arrears. The interest implicit in the lease was 10%.
Required:
(i) To show extracts of accounting treatment for the above lease transaction in Kache Kache
Transporters Limited’s:
Income Statement for the year ended 31st December 2009. (5½ marks)
(ii) Statement of Financial Position for the year ended 31st December 2009. (9½ marks)
(b) The objective of IAS 37: Provisions, Contingent Liabilities and Contingent Assets; is to ensure
appropriate recognition criteria and measurement bases are applied to provisions, contingent
liabilities and contingent assets. IAS 37 also ensures that sufficient information is disclosed in
the notes to financial statements to enable users understand their nature, timing and amount.
With reference to IAS 37: Provisions, Contingent Liabilities and Contingent Assets, define:
(i) A Provision. (1 mark)
(ii) A Contingent Liability. (2 marks)
(iii) A Contingent Asset. (2 marks)
(iv) State the criteria (conditions) for recognising provisions in a firm’s financial statements as set
out by IAS 37. (3 marks)
(v) Describe guidelines under IAS 37 for measuring provisions to recognise in an entity’s
financial statements. (2 marks)
[Total: 25 marks]

39
Question 5
Kapiri and Mposhi have been trading as partners for ten years now, sharing profits and losses in the ratio
2:1 respectively. Their Statement of Financial Position as at 31 December 2009 is as follows:
Statement of Financial Position as at 31st December 2009
Assets
Non-current Assets K’000
Land and Buildings at Fair Value 27,000
Motor Vehicles at Net Book Value 13,500
Equipment at Cost 9,000
Total Non-current Assets 49,500
Current Assets
Inventory 7,200
Trade Receivables 5,400
Cash and Cash Equivalents 900
Total Assets 63,000
Capital and Liabilities
Capital Account Balances: Kapiri 28,800
Mposhi 14,400
43,200
Current Account Balances: Kapiri 2,700
Mposhi 3,600
49,500
Non-current Liabilities
Loan Notes 9,000
Current Liabilities
Trade Payables 4,500
Total Equity and Liabilities 63,000
In order to qualify for funds from the Citizen Economic Empowerment Commission (CEEC), the partners
decided to formalise their business and converted the partnership into a Limited Company on 1 January
2010, registering it as Kapiri-Mposhi Limited on the same day. The new company management agreed to
take over all assets at a purchase consideration of K72 million, payable by K54 million in shares of K1 in
the new company at par, plus K18 million cash.

40
The partners will pay all partnership debts from their accounts. Shares in the new firm will be divided
between the two partners in their profit sharing ratio.
Required:
Prepare the following accounts to record conversion of the partnership into KAPIRI-MPOSHI Limited:
(a) Realisation Account (8 marks)
(b) Cash and Cash Equivalents Account (5 marks)
(c) Partners’ Current and Capital Accounts (9 marks)
(d) Equity Account (in KAPIRI-MPOSHI Ltd) (3 marks)
[Total: 25 marks]

41
Question 6
(a) IAS 16: (Property, Plant and Equipment) prescribes accounting treatment of tangible non-current
assets.
The data in the table below is an extract from the Non-current Asset Register of Cuundu Trading
Limited as at 31st December 2009:
Cost/Valuation Depreciation Revaluation
Surplus
K’000 K’000 K’000

Land & Buildings (1st Jan. 09) 650,000  12,000

Plant at 1st Jan. 09 640,000 160,000 
An inspection of the payables ledger revealed an outstanding amount of K120 million on an
invoice dated 30th June 2009 due to Gonde Engineering Limited for supply of an item of plant
which Cuundu Trading Limited commissioned on the date of the invoice.
Cuundu Trading Limited depreciates all plant at 12½% per annum, reducing balance.
Further, you are informed that Cuundu Trading Limited has a policy of revaluing Land and
Buildings every 31st December. The valuation in the table above includes the land element at
K150 million. The estimated remaining life of the building at 31st December 2008 was
20 years.
The professional valuer’s certificate on 30th December 2009 retained the value of land at the last
valuation figure, but showed the buildings’ new value as K460 million.
Required:
(a) Show extracts for exhaustive treatment of the above in Cuundu Trading Limited’s Income
Statement and Statement of Changes in Equity for the year ended 31st December 2009 as
well as in the Statement of Financial Position as at 31st December 2009.
NB. Show all relevant workings as well as the disclosure format for movements in Non-
current Assets. (15 marks)
(b) Briefly explain the benefits and drawbacks of cash and accruals basis of accounting as
applied in public sector accounting. (10 marks)
[Total: 25 Marks]

END OF PAPER

42
 DECEMBER 2010
L1: FINANCIAL REPORTING
SUGGESTED SOLUTIONS

43
Solution 1
(a) An explanation of associate and accounting treatment thereof in consolidated financial statements.

IAS 28: Investments in Associates, defines an associate as an investment in which an investor has
significant influence. Significant influence is usually ascertained by an investor holding between
20% and less than 50% of voting shares and board representation in investee.
IAS 28 requires associates to be accounted for in Consolidated Financial Statements using the
Equity Method.
Under equity method, the parent should include its share of earnings in the associate whether or
not the latter distributes earnings as dividend. This is achieved by adding the parent’s share of the
associate’s profit after tax to the consolidated retained earnings of the parent.
In the statement of financial position, investment in associate is recorded initially at cost. In
subsequent years, this investment will be shown at a value increased (or decreased) by the
amount of the parent’s share of the associate’s retained earnings. (3 marks)
(b) P Group

Statement of Financial Position as at 31st December 2009

Assets K’000 K’000
Non-current Assets
Property, Plant and Equipment (W2) 355,800
Goodwill (W4) 50,400
Investment in Associate 30,880
437,080
Current Assets
Inventory (22+48-4) 66,000
Trade Receivables (78+44-1-16) 105,000
Cash and Cash Equivalents (4+12+8) 24,000
195,000
Total Assets 632,080

44
 Equity and Liabilities
Equity
Equity Shares of K1 each 400,000
Retained Earnings (W6) 41,920
441,920
Non-Controlling Interest (W7) 43,160
Total Equity 485,080
Non-current Liabilities
12% Loan Notes 104,000
Current Liabilities
Trade Payables (40+20-1-16) 43,000
Total Equity and Liabilities 632,080

Workings
1. Group structure P

128m shares/160m shares = 80% 40%

2. Property, Plant and Equipment K’000

P’s Carrying Value of PPE 160,000
S’s Carrying value of PPE 192,000
Fair value adjustment 4,000
Less additional depreciation (K4m/20 yrs) (200)
355,800
3. Unrealised Profit
Selling Price  Margin, i.e. ¼ (since all goods are unsold) 4,000
4 Goodwill in S K’000 K’000
Consideration transferred 240,000
Net assets acquired:
Equity Shares 160,000
Retained Earnings 25,600
Fair value adjustment 4,000
189,600
Group share at 80% (151,680)
Goodwill 88,320
Goodwill impairment (37,920)
Goodwill to CSOFP 50,400
45
5. Investment in Associate
Cost of investment in Associate (as per question) 52,000
Share of loss for the year [(31.2m-K84m)  40%] (21,120)
30,880
6. Group Retained Earnings P S A
Per question 84,000 52,000 31,200
Less Pre-acquisition profits  (25,600) (84,000)
Unrealised profits (W3) (4,000)  
Goodwill impairment (37,920)
Depreciation on Fair value adjustment  (200) 
42,080 26,200 (52,800)
Share in S (K26,200  80%) 20,960
Share in A (-K52,800  40%) (21,120)
41,920
7. Non Controlling Interest (NCI) in S
Equity Shares 160,000
Retained Earnings 52,000
Fair Value adjustment 4,000
Additional Depreciation on fair value (K4m/20years) (200)
215,800
NCI’s Share (i.e. @ 20%  K215.8 million) 43,160

46
Solution 2
(i) PROFED Learning Media
Income Statement for the Year Ended 31st December 2009
K’000
Revenue 458,240
Cost of Sales (w1) (87,276)
Gross Profit 370,964
Administration Expenses (96,400)
Distribution Expenses (13,600)
Operating Profit 260,964
Finance Costs (w4) (13,197)
Profit Before Tax 247,767
Taxation (K14,600,000-K320,000-K1,500,000) (12,780)
Profit After Tax 234,987
(ii) PROFED Learning Media
Statement of Changes in Equity for Year Ended 31st December 2009
Equity S/Premium R/Earnings Total
K’000 K’000 K’000 K’000
Balance @ 1 Jan 2009 48,000 9,600 27,200 84,800
Issue of Shares 9,600 2,288  12,288
Profit for the Year   234,987 234,987

Balance @ 31 Dec 2009 57,600 12,288 262,187 332,075

(iii) PROFED Learning Media
Statement of Financial Position as at 31st December 2009
Assets K’000 K’000
Non-current Assets
Property, Plant and Equipment (W7) 493,160
Current Assets
Inventory [K1,840,000-K96,000 (W5)] 1,744
Trade Receivables 26,400
Cash and Cash Equivalents 22,160 50,304
Total Assets 543,464

47
 Equity and Liabilities
Equity
Equity Shares of K0.50 each 57,600
Share Premium 12,288
Retained Earnings 262,187
Total Equity 332,075
Non-current Liabilities
10% Redeemable Preference Shares 80,000
10% Loan Notes 64,000
Deferred Tax (K8,960,000-K1,500,000) 7,460
Lease Obligation exceeding 12 months (W3) 17,357
168,817
Current Liabilities
Trade Payables 9,672
Current Tax 14,600
Accrued Finance Cost on Lease 1,997
Lease Obligation not exceeding 12 months [(K26.957  17.3570)  K1.997m] 7,603
10% Loan Note Interest 700
10% Redeemable Preference Share Dividends (10%  K80m) 8,000
Total Equity and Liabilities 543,464
WORKINGS
1. Cost of Sales K’000
Per Question 411,060
Less Cost of Lecture Theatre (350,000)
Depreciation (W2) 26,120
Loss in Inventory (W5) 96
87,276

2. Depreciation K’000
Buildings [(Old) K100,000,000/40 years] 2,500
Buildings [(New) K350,000,000/25 years  9/12] 10,500
Equipment [20%  (K60,000,000-K36,000,000)] 4,800
Leased Lecture Theatre 8,320

48
 26,120
3. Lease Amortisation Schedule
Fair value 1st Jan 2008 41,600
1st Instalment - payment @ 1st Jan 2008 (9,600)
Liability at 1st Jan 2008 32,000
8% Interest at 31 Dec 2008 2,560
Liability at 31st Dec 2008 34,560
2nd Instalment - payment @ 1st Jan 2009 (9,600)
Liability at 1st Jan 2009 24,960
8% Interest at 31st Dec 2009 1,997
Liability at 31st Dec 2009 26,957
3rd Instalment - payment @ 1st Jan 2010 (9,600)
Liability at 1st Jan 2010 17,357

4. Finance Cost
10% × K64,000,000 × 6/12 = K3,200,000, Total Expense 3,200.000
Less Payment (2,500,000)
K700,000; Accrued to SOFP. 700,000
10% Preference Shares of K80 million gives Preference Dividend of K8,000,000
Hence, total finance costs=K3.2m + K8m + K1.997m (Lease interest) = K13.197m

5. Inventory
The carrying amount of inventory of K368,000 should be written down by K96,000 to K272,000.

6. Rights Issue
Equity value of K48 million represents 96 million shares (i.e. 48 million/K0.50). Number of rights
shares = 19.2 million (96 million/5 shares). Rights issue records to clear Suspense figure should
be:
Suspense (19.2 million shares  K0.64) Dr K12,288,000
Equity (19.2 million shares  K0.50) Cr K9,600,000
Share Premium (19.2 million shares  K0.14) Cr K2,688,000

49
7. Non-current Assets
Land & Leased Equipment
Buildings Asset Total
K’000 K’000 K’000 K’000
Cost/Valuation
Balance @ 1 Jan 2009 132,000 41,600 60,000 233,600
Additions 350,000 ─ ─ 350,000

Balance @ 31 Dec 2009 482,000 41,600 60,000 583,600

Depreciation
Balance @ 1 Jan 2009 20,000 8,320 36,000 64,320
Charge for the year (W2) 13,000 8,320 4,800 26,120

Balance @ 31 Dec 2009 33,000 16,640 40,800 90,440

NBV at 31 Dec 2009 449,000 24,960 19,200 493,160

50
Solution 3
(a) Sangwapo Plc
Statement of Cash Flows for Year Ended 31st December 2009
K’000 K’000
Cash Flows from Operating Activities
Net Profit Before Taxation 2,169
Depreciation (W1) 150
Amortisation of Development Expenditure 129
Interest Expense 330
Movement in Allowance for Court Case (K0.219m-K0.150m) 69
Loss on Disposal of Tangible Non-current Asset 18
Operating Profit Before Changes in Working Capital 2,865
Decrease in Inventory (K2.103m-K1.857m) 246
Increase in Receivables (K1.476m-K1.572m) (96)
Decrease in Payables (K1.587m-K1.551m) (36) 114
Cash Generated from Operations 2,979
Interest paid (K0.09m+K0.33m-K0.3m) (120)
Dividend paid (K0.42m+K0.243m-K0.243m) (420)
Taxation paid (K0.678m+K0.72m-K0.714m) (684) (1,224)
Net Cash Flow from Operating Activities 1,755
Cash Flows from Investing Activities
Purchase of Tangible Non Current Assets (600)
Purchase of Intangible Non Current Assets (W2) (1,923)
Purchase of Investments (K1.092m-K0.375m) (717)
Proceeds from Disposal of Non-Current Asset 309
Net Cash Flow from Investing Activities (2,931)
Cash Flows from Financing Activities
Proceeds from Share Issue (K1.5m+K0.936m-K0.9m-K0.852m) 684
Proceeds from Issue of Loan Notes (K0.66m-K0.264m) 396
Net Cash Flow from Financing Activities 1,080
Net Decrease in Cash and Cash Equivalents (96)
Cash and Cash Equivalents at Start 243
Cash and Cash Equivalents at end (K0.051m+K0.096m) 147

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Workings
1 Tangible Non-current Assets 2. Intangible Non-current Assets
K’000 K’000 K’000 K’000
Balance b/d 2,043 Disp. (309+18) 327 Balance b/d 2,451 Amortisation 129
Bank (Additions) 600 Dep. (Bal. Fig.) 150 Bank (Additions) 1,923 Balance c/d 4,245
Revaluation 330 Balance c/d 2,496
2,973 2,973 2,973 2,973

(b) Identification of any five users of financial statements and their benefits from ratio analysis:

(i) Shareholders
─ To assess management performance.
─ For investment decision making e.g. purchase or disposal of shares.
─ Comparison of their return on investment with some benchmark.

(ii) Potential Investors

─ For better yield identification compared with current market returns.
─ To assess opportunity for acquisition of an entity for greater market share.

(iii) Lenders (providers of debt capital)

─ To assess financial strength of a target company.
─ To review exposure to financial risk through gearing.
─ To ascertain whether or not an entity would be able to service current or increased
debt.

(iv) Employees
─ Ratios form a basis for higher pay negotiations.
─ For assessment of results of their efforts.

(v) Management
─ Uses ratios to compare their own performance with industry average.
─ Ratios enable management identify areas of improvement.
─ Uses results of ratio analysis to justify decisions on request for pay rise.

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(vi) Suppliers
─ Use ratios for their decisions to grant initial or further trade credit.
─ Use ratios to assess whether or not an entity is a going concern.

(vi) Government and its agencies

─ Use ratio analysis for statistical planning purposes.
─ For assessment of tax revenue.

(vii) The Public

─ Researchers and trade journalists use ratios for their various editorial needs.
─ Society may want to know corporate social responsibility and corporate citizenship of
the firm.

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Solution 4
(a) (i) Kache Kache Transporters Ltd’s

Income Statement (EXTRACT) Year Ended 31st December 2009

K’000 K’000
COS (Depreciation on PPE: K140m/7 years) shorter of LP & ELA 20,000
Finance Costs - Lease Interest (W1) 13,632

(ii) Kache Kache Transporters Ltd’s

Statement of Financial Position (EXTRACT) as at 31st December 2009

Assets K’000 K’000

Non-current Assets
Property, Plant and Equipment (K140m-K20m) 120,000
Non-Current Liabilities
Lease Obligation payable after 12 months (W1) 106,147
Current Liabilities
Lease Obligation payable within 12 months (K28m-K12.195m) 15,805
Working

K’000
1 Fair Value on 1 January 2009 140,000
Less Deposit on 1 January 2009 (3,680)
Liability at 1 January 2009 136,320

Balance (of Liability) on 1 January 2009 136,320

Interest at 10% on 31 December 2009 13,632
1st Instalment on 31 December 2009 (28,000)
Balance on 1 January 2010 121,952
Interest at 10% on 31 December 2010 12,195
2nd Instalment on 31 December 2010 (28,000)
Balance on 1 January 2011 106,147

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(b) (i) A Provision is a liability of uncertain timing and amount.

(ii) A Contingent Liability is a possible obligation arising from past events and whose existence
will be confirmed only by occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity.

(iii) A Contingent Asset is a possible asset that arises from past events and whose existence will
be confirmed only by occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the entity.
(iv) A provision should be recognised when, and only when:

(a) An entity has a present obligation (legal or constructive) as a result of past events.

(b) It is probable (i.e. more likely than not) that an outflow of resources embodying
economic benefits will be required to settle the obligation, and

(c) A reliable estimate can be made of the amount of the obligation.

(v) The amount recognised as provision should be measured as the best estimate of the
expenditure required to settled the present obligation at the reporting date or to transfer it to
a third party at that time.

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Solution 5
(a) REALISATION ACCOUNT
K’000 K’000
Buildings 27,000 Kapiri-Mposhi Ltd 72,000
Motor vehicles 13,500
Equipment 9,000
Inventory 7,200
Trade Receivables 5,400
Share of profit on Realisation:
Kapiri 2/3 6,600
Mposhi 1/3 3,300
72,000 72,000

(b) CASH AND CASH EQUIVALENTS ACCOUNT

K’000 K’000
Balance b/d 900 Capital - Kapiri 11,100
Kapiri-Mposhi Ltd 18,000 - Mposhi 7,800
18,900 18,900

c) PARTNERS’ CURRENT AND CAPITAL ACCOUNTS

KAPIRI MPOSHI KAPIRI MPOSHI
K’000 K’000 K’000 K’000
Shares in 36,000 18,000 Capital a/c balances 28,800 14,400
KAPIRI Ltd
Current a/c balances 2,700 3,600
Cash & Profit on Realisation 6,600 3,300
Cash 11,100 7,800 Loan notes 6,000 3,000
equivalent Payables 3,000 1,500

47,100 2,800 47,100 25,800

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(d) EQUITY ACCOUNT : KAPIRI-MPOSHI LTD
K’000 K’000
Balance c/d 54,000 Capital a/cs Kapiri 36,000
Mposhi 18,000
54,000 54,000

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Solution 6
(a) (i) Cuundu Trading Ltd
Income Statement (EXTRACT) Year Ended 31st December 2009
K’000 K’000
Cost of sales (Depreciation on PPE - W1) 92,500
Excess on Revaluation deficit 3,000

(ii) Cuundu Trading Ltd

Statement of Changes in Equity (EXTRACT) Year Ended 31st December 2009

Equity R/Surplus R/Earnings Total

K’000 K’000 K’000 K’000
Balance @ 1 Jan 2009 ─ 12,000 ─ 12,000
Revaluation of deficit (maximum) ─ (12,000) ─ (12,000)
─ ─ ─ ─

(iii) Cuundu Trading Ltd

Statement of Financial Position (EXTRACT) as at 31st December 2009
Assets K’000
Non-current Assets
Property, Plant and Equipment (W3) 1,142,000
Current Liabilities
Payable for item of Plant 120,000
WORKINGS
1. Plant Depreciation
Old (640,000,000-K160,000,000  12½%) 60,000
New (120,000,000  12½%  6/12) 7,500
67,500

2. Land and Buildings Valuation Schedule

Fair value at 1st Jan 2009 650,000
Depreciation [Buildings only: (K650m – K150m)/20 years] (25,000)
Revaluation loss (15,000)
Fair value at 31st Dec 2009 610,000

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3. Non-current Assets
Land & Plant
Buildings Total
K’000 K’000 K’000
Cost/Valuation
Balance @ 1 Jan 2009 650,000 640,000 1,290,000
Additions  120,000 120,000
Revaluations (15,000)  (15,000)
Balance @ 31 Dec 2009 635,000 760,000 1,395,000
Depreciation
Balance @ 1 Jan 2009 - 160,000 160,000
Charge for the year 25,000 67,500 92,500
Balance @ 31 Dec 2009 25,000 227,500 252,500
NBV
At 1 Jan 2009 650,000 480,000 1,130,000
At 31 Dec 2009 610,000 532,500 1,142,500

(b) (i) Accrual Basis Accounting Versus Cash Basis Accounting

The Cash basis of accounting
Cash accounting, which is also known as cash basis accounting, allows for the
recognition of income at the time it is actually received. This means that invoiced income is
not counted as an asset until payment for the invoice is actually in hand. The same approach
is applied to debits, in that any expenses incurred are not posted until they are paid.
The cash basis of accounting recognises transactions and events only when cash has been
received or paid. The elements of the financial statements will be cash receipts, cash
disbursements and cash balances.
The full Accrual Basis of accounting
In contrast, accrual accounting does recognise income at the time it is earned. As goods or
services are invoiced, the invoices are posted and counted as assets. They remain in this
state until the face value of the invoice is credited for some reason. In like manner, any
expenses are also posted at the time they are incurred or an invoice for those expenses is
received, and remains open until the expenses are paid. Accrual basis means a basis of
accounting under which transactions and other events are recognised when they occur
(and not only when cash or its equivalent is received or paid). The general idea is that

59
economic events are recognized by matching revenues to expenses (the matching
principle) at the time in which the transaction occurs rather than when payment is made
(or received). This method allows the current cash inflows/outflows to be combined with
future expected cash inflows/outflows to give a more accurate picture of a company's
current financial condition. The elements recognized under accrual accounting are
assets, liabilities, net assets/equity, revenue and expenses.

Advantages and disadvantages of the cash method.

Cash accounting is simpler to maintain, easier to understand, and simplifies tax filing
by allowing individuals or businesses to take deductions for business expenses paid in
cash, while paying tax on revenues only received in cash. When individuals or
businesses use the cash accounting method, the income statement shows the same
cash increase or decrease as the cash flow statement.
Though the cash method provides a more accurate picture of how much actual cash your
business has, it may offer a misleading picture of longer-term profitability. Under the
cash method, for instance, your books may show one month to be spectacularly
profitable, when actually sales have been slow and, by coincidence, a lot of credit
customers paid their bills in that month. Cash-based accounting can distort the true
operations of your business, and incorrectly reflect income, for example, if in a given
period you collect little or no receivables and you pay lots of bills, under the cash-
accounting method, you have expense without income you've lost money. On the other
hand, if you collect a lot of money and don't pay your bills, you have big income. That's a
major distortion of what actually occurred.

Advantages and disadvantages of the accrual method.

Accrual accounting is considered to be the standard accounting practice for most
companies. Accrual accounting, on the other hand, provides more timely information
since revenues and expenses are recorded when they occur. This follows the matching
principle, which requires companies to report all revenue with the expenses that were
required to generate that revenue for the period. Accrual accounting is also the reason
double entry accounting is required, since not all transactions necessarily affect the cash
account, as is the case in cash accounting.
This method provides a more accurate picture of the company's current condition, but
its relative complexity makes it more expensive to implement. Further more, accrual
accounting may leave you in the dark as to what cash reserves are available, which
could result in a serious cash flow problem. For instance, your income ledger may show

60
thousands . of kwacha in sales, while in reality your bank account is empty because your
customers haven't paid you yet.
Under accrual accounting method, net income does not necessarily equal cash.

61
 ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL
L1: FINANCIAL REPORTING

SERIES: JUNE 2011

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) 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: Attempt this ONE question.
Section B: Attempt THREE questions only.
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. 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.
6. All workings must be done in the answer booklet.
7. Present legible and tidy work.
8. Graph paper (if required) is provided at the end of the answer booklet.

62
SECTION A
Attempt this one compulsory question in this section.
Question 1
Chachacha Limited, who prepares its Financial Statements in accordance with International Financial
Reporting Standards (IFRSs), extracted a Trial Balance for the year ended 31st March 2011 as shown
below:
K’000 K’000
Revenue 304,000
Cost of sales 197,440
Distribution costs 13,920
Administrative expenses (note (i)) 40,400
Loan interest paid (note (ii)) 1,920
Investment income 1,040
Profit on sale of Investments (note (iv)) 1,760
Freehold Property - at cost 1 April 2002 (note (vi)) 50,400
Plant and Equipment - at cost (note (vi)) 33,760
Machinery - at cost on 1 April 2008 (note (vi)) 80,000
Accumulated depreciation 1 April 2010 :Buildings 6,400
: Plant and Equipment 15,760
:Machinery 32,000
Available-for-sale investments (note (iv)) 21,200
Inventory at 31 March 2011 (note (iii)) 22,400
Trade receivables 34,394
Cash and Cash Equivalents 4,614
Trade payables 30,320
Equity shares of K20 each 50,000
12% Loan Note, redeemable in 2014 (note (ii)) 18,000
Retained earnings at 1 April 2010 32,848
Other reserves (note (iv)) 4,000
Deferred Tax (note (v)) 4,320
––––––––– –––––––––
500,448 500,448
––––––––– –––––––––

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The following additional information is also made available:
(i) During the year, Chachacha Limited paid an equity dividend of K2.00 per share and this amount is
included in the administrative expenses figure in the trial balance.
(ii) The 12% Redeemable Loan note was issued for proceeds of K16 million on 1st April 2009. It has
an effective interest rate of 18% due to the value of its redemption.
(iii) The trial balance inventory figure includes an identifiable inventory item with a cost of K8.4 million.
Management of Chachacha Limited has advised that even though this item is damaged, an active
scrap market exists for which K9.7 million sale proceeds would be received and K4.6 million spent
to put this inventory in a saleable condition.
(iv) During the current year, Chachacha Limited sold an available-for-sale investment for K8.8 million.
At the date of this sale, the said investment which had originally cost K5.6 million had a carrying
amount of K7.040 million. Chachacha Limited has recorded this disposal in its books. The
remaining available-for-sale investments in the trial balance (of K21.2 million) have a fair value of
K23.2 million at 31st March 2011. Other reserves in the trial balance represent the net increase in
the value of Available-for-sale investments as at 31st March 2011. Ignore deferred tax on these
transactions.
(v) Directors of Chachacha Limited have estimated the provision for income tax for the year ended
31st March 2011 at K12.96 million. At the same date, the deferred tax provision was adjusted to a
credit balance of K7.44 million due to a change in the value of the net assets.
(vi) The Freehold property has a land element of K10.4 million. The building element is being
depreciated on a straight-line basis.
Plant and equipment is depreciated at 40% per annum, reducing balance method.
Chachacha Limited’s Machinery is depreciated over its useful life of 5 years on straight line basis,
and management has adopted a revaluation policy for its Machinery to suit the kind of business
the company is engaged in. On 1st October 2010, Chachacha Limited decided to revalue its
Machinery to K88 million and its useful economic life at the time of valuation was estimated to be
4 years. It is the company’s policy to charge depreciation on its Machinery proportionately.
No depreciation has yet been charged on any non-current asset for the year ended 31st March
2011. Depreciation, amortisation and impairment are all charged to cost of sales.
Required:
(a) Prepare Chachacha Limited’s Statement of Comprehensive Income and Statement of
Changes in Equity for the year ended 3st 1 March 2011. (15 marks)
(b) Prepare Chachacha Limited’s Statement of Financial Position at 31st March 2011.
(10 marks)
Notes to the financial statements are not required.
(Total: 25 marks)

64
SECTION B

Attempt any three questions only in this Section.

Question 2

Pride Plc made the following equity investments:

On 1st April 2010, 12.8 million of the 16.0 million, K1 issued share capital of Self-esteem through a
share exchange of three shares in Pride for every five shares in Self-esteem, plus a cash payment of K2
per Self-esteem share payable in three years’ time. The market price per share of Pride’s shares on 1
April 2010 was K4, and the group’s cost of capital on the same date was estimated at 6% per annum.
On 1st January 2011, 4.8 million of the 12 million, issued equity shares of Arrogance, paying K2.40 per
share in cash. On the same date, Pride issued 15% Loan notes to shareholders of Arrogance on the
basis of K100 Loan note for every 100 shares acquired.
The separate Income Statements of the three companies for the year ended 31 March 2011 are given
below:

Pride Self-esteem Arrogance

K’000 K’000 K’000
Revenue 84,000 49,600 40,000
Cost of Sales (54,400) (29,200) (48,800)

Gross Profit/(loss) 29,600 20,400 (8,800)

Other Income (note vi) 320 (0) (0)
Distribution Costs (3,200) (1,600) (3,600)
Administrative Costs (6,000) (5,600) (6,800)
Finance Costs (960) (720) (0)
Profit/(loss) before tax 19,760 12,480 (19,200)
Income Tax (expense)/credit (6,960) (2,080) 3,200
Profit/(loss) for the period 12,800 10,400 (16,000)

65
You are also given the following information:
(i) No fair value adjustments were needed on the date of acquisition of Arrogance; while the fair
values of Land, Plant and Development Expenditure, exceeded their book values by K2.4 million,
K4.0 million and K3.2 million respectively, on the date Self-esteem was acquired.
Further, the Plant had a useful life of five years at the date of this acquisition and Development
Expenditure which qualified as an intangible non-current asset was still in development. Self-
esteem had not yet incorporated these fair value adjustments in its financial statements and
management has advised that depreciation on Plant is chargeable to cost of sales.

(ii) The retained earnings of Self-esteem and Arrogance at 1st April 2010 were K14.4 million and
K28.0 million respectively.
(iii) During the year under review, Pride sold goods to Self-esteem at a selling price of
K14.4 million, making a profit of 25% on cost. At 31st March 2011, K6 million of these goods were
still in Self-esteem’s inventories.
(iv) Other Income in Pride’s Income Statement represents dividend received from Self-esteem on 30th
April 2011.
(v) You are to assume that trading profits and losses of the above firms accrue evenly throughout the
year.
(vi) On 31st March 2011, impairment tests for both Self-esteem and Arrogance were conducted. At
that date, it was resolved that the subsidiary’s goodwill be written-down by 20% of its value at
acquisition; while the investment in Associate was to be equal to K14 million, due to the
associate’s continued losses since acquisition.
(vii) Assume that the present value of K1 receivable in three years’ time at 6% discount rate is 0.840
Required:
(a) Prepare the Consolidated Income Statement of the Pride Group for the year ended 31st
March 2011. (16 marks)
(b) Calculate Good will arising on acquisition of Self-esteem at 1st April 2010, assuming that
the group policy is to value goodwill based on the proportionate value. (5 marks)
(c) Calculate carrying amount of the investment in Arrogance at 31st March 2010 under the
equity method prior to the impairment test. (4 marks)
(Total: 25 marks)

66
Question 3

You are presented with an opening Statement of Financial Position as at 1 April 2010 and a listing of
ledger accounts as at 31 March 2011 for Fair Trade, a small private company.
A. Fair trade - Statement of Financial Position as at 1 April 2010:
Assets K’000 K’000

Non-current assets
Land and Buildings
(at valuation K14.76 million less accumulated
depreciation, K1.5 million) 13,260
Plant (at cost K21 million less accumulated
depreciation, K6.75 million) 14,250
Investments at cost 5,070
32,580
Current Assets
Inventory 17,220
Trade receivables 8,580
Bank 360
26,160
Total Assets 58,740
Equity and Liabilities

Equity
Ordinary Shares of K1 each 7,500
Share premium 1,500
Revaluation reserves 3,600
Retained Earnings 21,090
Total Equity 33,690
Non-current Liabilities
8% Loan notes 12,960
Current Liabilities
Trade Payables 9,420
Taxation 2,670
Total Equity and Liabilities 58,740

67
B. Fair trade - Ledger accounts listing as at 31st March 2011:

K’000 K’000

Land and Buildings at valuation 18,690

Plant at cost 25,380
Distribution costs
Accumulated depreciation on 31st March 2011 - Buildings 2,040
Accumulated depreciation on 31st March 2011 - Plant 11,280
Investments at cost 2,460
Trade receivables 15,120
Inventory 12,990
Bank 570
Investment income 120
Loan interest 510
Ordinary dividend 7,830
Ordinary Shares of K1 each 15,000
Share Premium 2,400
Retained earnings on 1st April 2010 21,090
Profit before interest and tax for year ended 31st March 2011 5,370
Revaluation reserve 5,400
8% Loan notes 11,940
Trade payables 8,010
Accrued loan interest 90
Taxation 330
83,310 83,310
Notes:

(i) The balance on taxation account is after settlement of a provision made to ZRA for the year
to 31st March 2010. A provision for the current year has not yet been made.
(ii) Plant with a carrying amount of K3.6 million and original cost of K7.05 million was sold for
K2.34 million during the year. The loss on sale has been included in the profit before
interest and tax.
(iii) The increase in the revaluation reserve was entirely due to revaluation of the company’s
land. No disposals of Land and buildings were made during the year.
(iv) There were no purchases of investments during the year; but investments with a cost of
K2.61 million were sold for K3.30 million in the period under review. The profit has been
included in the profit before interest and tax.

68
 (v) A bonus issue of ½ a share for 5 Ordinary shares was made on 1 October 2010, utilising
the Share premium account. The remainder of the increase in Ordinary shares was due to
an issue for cash on 30 October 2010.
Required:
Prepare Fair trade’s Statement of Cash flows for the year ended 31 March 2011 using the Indirect
method in accordance with IAS 7: Statement of Cash flows.
(Total: 25 marks]
Question 4

(a) Stem, Branch and Fruit agreed to dissolve their partnership on 1 April 2011, after being in
business for many years, sharing profits and losses in the ratio 3:2:1 respectively. Their Statement
of Financial Position as at 31 March 2011 was as follows:
Stem, Branch and Fruit
Statement of Financial Position as at 31st March 2011
Assets K’000
Non-current Assets
Furniture and fittings 400,000
Motor vehicles 280,000
680,000
Current Assets
Inventory 200,000
Trade Receivables 336,000
Bank 48,000
Total Assets 1,264,000
Capital and Liabilities
Partners’ capital accounts
Stem 360,000
Branch 240,000
Fruit 120,000
720,000
Partners’ current accounts
Stem 78,000
Branch 59,600
Fruit 50,400
188,000

69
 Non-current Liabilities
Loan 144,000
Current Liabilities
Trade Payables 212,000
Total capital and Liabilities 1,264,000

The following information that took place at the time of dissolution is made available:
(1) The partners agreed to let Fruit take his personal to holder vehicle at a valuation of K72
million, in addition to his share of the profit. At the time of this agreement, the motor
vehicle had a net book value of K64 million. Other motor vehicles were sold for K236
million; while inventory realised K222 million.
(2) Furniture and fittings were sold for K390.4 million.
(3) K319.2 million of the outstanding Trade receivables was collected.
(4) Trade payables were paid-off and the dissolving partnership received a discount of K8.48
million upon this settlement.
(5) The outstanding loan amount was also paid on dissolution and there were no outstanding
finance costs at that time.
(6) Dissolution expenses paid amounted to K8.0 million.

Required:
(a) Prepare the following accounts to record dissolution of the partnership:
(i) The Realisation account (10 marks)
(ii) Partners’ account (5½ marks)
(ii) Cash and bank account (5½ marks)
(b) With regard to dissolution of partnerships, discuss the ruling in Garner v. Murray case,
highlighting the usefulness of this judgement in dissolution of partnerships. (4 marks)
(Total: 25 marks)
Question 5

(a) You have been presented with financial statements of two medium sized companies, Addidaz and
Phuma, which are both in the same industry. You are required to calculate the following ratios for
the two companies:
(i) Earnings per share (2 marks)
(ii) Gross profit percentage (2 marks)
(iii) Return on capital employed (2 marks)
(Show all workings)

70
I. Income Statements for the year ended 31 March 2011
Addidaz Phuma
K’000 K’000
Revenue 5,500 7,200
Cost of Sales (4,400) (5,040)
Gross Profit 1,100 2,160
Operating Expenses (610) (1,685)
Operating profit 490 475
Finance costs (15) (15)
Profit Before Tax 475 460
Income tax (200) (180)
Net Profit for the year 275 280

II. Statements of Financial Position as at March 2011

Addidaz Phuma
K’000 K’000
Assets
Non-current assets 3,750 7,200
Current assets
Inventory 125 360
Trade receivables 500 190
Cash 30 Nil
Total assets 4,405 7,750
Equity and liabilities
Capital and reserves
Ordinary shares of K1 each 3,000 7,000
Reserves 1,080 410
4,080 7,410
Non-current liabilities
Loan notes 75 110
Current liabilities
Trade payables 200 205
Overdraft nil 5
Tax 50 20
Total equity and liabilities 4,405 7,750

71
 Profit Before Tax 475 460
Income tax (200) (180)
Net Profit for the year 275 280

(b) Arising from the ratios calculated above, comment on the performance of the two companies as
indicated by each of the ratios in (i) to (iii). (9 marks)
(c) Briefly describe five (5) limitations of using ratios as a basis for analysing business performance.
(5 marks)
(d) Explain how the following accounting terms are useful in enhancing the value of financial
statements to users:
(i) Going concern concept (1 mark)
(ii) Accruals Concept (1 mark)
(iii) Reliability (1 mark)
(iv) Understandability (1 mark)
(v) Comparability (1 mark)
(Total: 25 Marks)

72
Question 6

(a) Agriculture in Zambia is one of the major economic activities. In order to regulate accounting
practice in this sector, the IASB introduced IAS 41: Agriculture, which prescribes accounting
treatment of agricultural activities when preparing financial statements.
(i) What are the recognition criteria for biological assets under IAS 41: Agriculture?(6 marks)
(ii) Explain the measurement basis for biological assets recommended by IAS 41: Agriculture.
(4 marks)
(b) IAS 10: Events After the Reporting Period, gives guidance on accounting treatment of events
covered under this standard. Define:
(i) An adjusting event; (2 marks)
(ii) A non-adjusting event after the reporting period; and (2 marks)
(iii) State the accounting treatment for an adjusting event and non-adjusting event.(2 marks)
(c) Kings Trade Limited is a large manufacturing company in Zambia. Between the reporting date
and the date financial statements were to be authorised for issue, the following material events
occurred:
 It was discovered that a receivables balance existing at the reporting date will not now be
received.
 Kings Trade has announced a bid to take over another company, Maheu Limited.
 Some material errors have been discovered which show that financial statements for the
period under review are incorrect.
 The trade union has announced to management that the factory workforce at Kings Trade
has started strike action for an indefinite period of time.
Required:
For each of the four (4) events described above, state if they should be treated as an adjusting or
non-adjusting event after the reporting period for Kings Trade. (4 marks )
(d) Generally comment on how useful the accounting framework is in the preparation of financial
statements. Your answer should have particular reference to both the conceptual and regulatory
framework of accounting. (5 marks)
(Total: 25 marks)
END OF PAPER

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 JUNE 2011
L2: FINANCIAL REPORTING
SUGGESTED SOLUTIONS

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Solution 1

(a) (i) Chachacha Ltd

Statement of Comprehensive Income for the Year Ended 31st March 2011

K’000
Revenue 304,000
Cost of Sales (w1) (227,740)
Gross Profit 76,260
Administration Expenses [K40.4m - ((K50m ÷ K20)  K2)] (35,400)
Distribution Expenses (13,920)
Investment income 1,040
Profit on sale of Available-for-sale investments (w2) 3,200
Finance costs (18%  K16m) (2,880)
Profit Before Tax 28,300
Taxation [K12.96m + (K7.44 – 4.32)] (16,080)
Profit After Tax 12,220
Other Comprehensive income:
Gain on Available-for-sale investments (w3) 2,000
Realised profit charged to income on Available-for-sale investment (1,440)
Gain on revaluation of Machinery 48,000
Total Other Comprehensive income 48,560
Total Comprehensive income 60,780

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 (ii) Chachacha Ltd
Statement of Changes in Equity for Year Ended 31st March 2011

Share Other Retained

Capital Reserves Earnings Total
K’000 K’000 K’000 K’000
Balance @ 1 April 2010 50,000 4,000 32,848 86,848
Realised gain on AFSI nil (1,440) nil (1,440)
Gain on AFSI during the year nil 2,000 nil 2,000
Revaluation of Machinery nil 48,000 nil 48,000
Profit for the Year nil nil 12,220 12,220
Dividends paid nil nil (5,000) (5,000)
Balance @ 31 March 2011 50,000 52,560 40,068 142,628

(b) Chachacha Ltd

Statement of Financial Position as at 31st March 2011

Assets K’000
Non-current Assets
Property, Plant and Equipment (W4) 131,000
Available-for-sale investments 23,200
154,200
Current Assets
Inventory [K22.4m - K3.3m (W5)] 19,100
Trade Receivables 34,394
Cash and Cash Equivalents 4,614
Total Assets 212,308
Equity and Liabilities
Equity
Ordinary Shares of K2 each 50,000
Other reserves 52,560
Retained Earnings 40,068
Total Equity 142,628

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 Non-current Liabilities
12% Loan notes (W6) 18,960
Deferred tax (K4.32m + K3.12m) 7,440
Current Liabilities
Trade Payables 30,320
Current Tax 12,960
Total Equity and Liabilities 212,308
WORKINGS
1. Cost of Sales K’000
Per Question 197,440
Depreciation
 Buildings (K6.4m ÷ 8 years) 800
 Plant & Equipment [40%  (K33.76m  K15.76m)] 7,200
 Machinery (w5) 19,000
Loss on inventory [(K9.7m  K4.6m)  K8.4m] 3,300
227,740
2. Profit on Sale of Available-for-sale investment K’000
Gain in current year (K8.8m proceeds less K7.04m CA) 1,760
Reclassified past revaluation gains from other reserves:
(K7.04m, CA less K5.6m, Original cost) 1,440
3,200
Remaining investments have a fair value of K23.2 million at 31 March 2011, giving a fair value
increase of K2 million (credited to Other reserves, w3)

3. Other reserves (AFSI) K’000

Per question 4,000
Reclassified gain (w2) (1,440)
Increase during the year (w2) 2,000
Carrying amount 4,560

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4. Non-current Assets
Freehold Plant &
Property Equipment Machinery Total
K’000 K’000 K’000 K’000
Cost/Valuation
Balance @ 1 Apr 2010 50,400 33,760 80,000 164,160
Revaluation (W5) - - 48,000 48,000
Balance @ 31 Mar 2011 50,400 33,760 128,000 212,160
Depreciation
Balance @ 1 Apr 2010 6,400 15,760 32,000 54,160
Charge for the year (w1 & w5) 800 7,200 19,000 27,000
Balance @ 31 Mar 2011 7,200 22,960 51,000 81,160
NBV at 1 Apr 2010 44,000 18,000 48,000 110,000
NBV at 31 Mar 2011 43,200 10,800 77,000 131,000

5. Machinery revaluation K’000

At 1 April 2010 80,000
Accumulated Depreciation (32,000)
Depreciation, i.e. from 1.04.10 - 1.10.10; [(K80m ÷ 5) × ½] (8,000)
Depreciation, i.e. from 1.10.10 - 31.03.11; [(K88m ÷ 4) × ½] (11,000)
Revaluation - bal. figure 48,000
At 31 March 2011 (NBV) 77,000

6. 12% Loan note redeemable 2014 K’000

Per question (Trial balance) 18,000
Add 18% Effective interest on nominal value 2,880
Less amount paid in trial balance (1,920)
Carrying value at 31 March 2011 18,960

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Solution 2

(a) Pride Group

Consolidated Income Statement for the Year Ended 31 March 2011
K’000
Revenue (84,000 + 49,600 - 14,400 intra group) 119,200
Cost of Sales (see working) (71,200)
Gross Profit 48,000
Distribution costs (3,200 + 1,600) (4,800)
Administration Expenses (6,000 +5,600) (11,600)
Finance costs (960 + 720) (1,680)
Impairment losses:
Goodwill [20%  20,224 - see part (b)] (4,045)
Investment in associate (14,720 - 14,000) (720)
Share of loss from associate (16,000  40%  3/12) (1,600)
Profit before Tax 23,555
Taxation (6,960 + 2,080) (9,040)
Profit for the period 14,515
Attributable to:
Equity holders of the parent 12,595
Non-controlling interests {(10,400 - 800 additional depreciation)  20%} 1,920
14,515
Note: Dividend in Self-esteem is eliminated on consolidation.
Cost of sales working:
K’000
Pride per question 54,400
Self-esteem per question 29,200
Intra group purchases (14,400)
Additional depreciation on plant (4,000 ÷ 5 years) 800
Unrealized profits in inventories [6,000  (25% ÷ 125%)] 1,200
71,200

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(b) Goodwill

K’000 K’000
Consideration transferred:
Share exchange (12,800  80%  3/5  K4) 30,720
Deferred consideration (12,800  K2  0.840) 21,504
52,224
Less
Equity shares 16,000
Pre acquisition reserves 14,400
Fair value adjustments (3,200 + 2,400 + 4,000) 9,600
40,000  80% (32,000)
20,224
(c) Carrying amount of Arrogance before impairment

At cost: K’000
Cash (4,800  K2.4) 11,520
15% Loan note [4,800  (K100 ÷ 100)] 4,800
16,320
Less Post acquisition losses (16,000  40%  3/12) (1,600)
14,720

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Solution 3

Fair trade

Statement of Cash Flows for Year Ended 31 March 2011

K’000 K’000
Cash Flows from Operating Activities
Net Profit Before interest and Taxation 5,370
Depreciation (wi) [540 + 7,980] 8,520
Loss on sale of plant (3,600 – 2,340) 1,260
Profit on sale of investments (3,300 – 2610) (690)
Decrease in Inventory (17,220 – 12,990) 4,230
Increase in Receivables (15,120 – 8,580) (6,540)
Decrease in Payables (9,420 - 8,010) (1,410)
Cash Generated from Operations 10,740
Interest paid (510 – 90) (420)
Taxation paid (2,670 + 330) (3,000)
Net Cash Flow from Operating Activities 7,320
Cash Flows from Investing Activities
Purchase of Plant (wi) (11,430)
Purchase of Land and buildings (2,130)
Investments income 120
Sale of plant (wi) 2,340
Sale of investments 3,300
Net Cash used in Investing Activities (7,800)
Cash Flows from Financing Activities
Proceeds from Share Issue 8,400
Redemption of 8% loan notes (12,960 - 11,940) (1,020)
Ordinary dividend paid (7,830)
Net Cash used in Financing Activities (450)
Net Decrease in Cash and Cash Equivalents (930)
Cash and Cash Equivalents at Start 360
Cash and Cash Equivalents at End (570)
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Workings
(i) Non-current assets
Land and buildings:
Valuation b/f 14,760
Revaluation surplus (5,400 - 3,600) 1,800
Acquisitions - balancing figure 2,130
Valuation c/f 18,690
Depreciation b/f 1,500
Charge for the year - bal. Figure 540
Depreciation c/f 2,040
Plant:
Cost b/f 21,000
Disposals at cost (7,050)
Acquisitions - bal. figure 11,430
Cost c/f 25,380
Depreciation b/f 6,750
Disposals (3,450)
Charge for the year - bal. Figure 7,980
Depreciation c/f 11,280
Disposal of plant:
Net book value 3,600
Proceeds from question (2,340)
Loss on sale 1,260
(ii) Share capital and share premium:
Ordinary shares b/f 7,500
Bonus issue of ½ for 5 (from premium) 750
Ordinary shares c/f (15,000)
Share issue for cash - difference (6,750)

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 Share premium:
Share premium b/f 1,500
Bonus issue (750)
Share premium c/f (2,400)
1,650

Total proceeds of issue (6,750 + 1,650) 8,400

(iii) Reconciliation of revaluation reserve
Balance b/f 3,600
Revaluation of land - difference 1,800
Balance c/f 5,400

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Solution 4
(a) (i) REALISATION ACCOUNT
K’000 K’000
Furniture 400 000 Loan account 144,000
Motor vehicles 280,000 Trade Payables 212,000
Inventory 200,000 Cash and bank:
Trade Receivables 336,000 Furniture and fittings 390,400
Cash and bank: Motor vehicles 236,000
Loan 144,000 Inventory 222,000
Trade payables 203,520 Receivables 319,200
Dissolution expenses 8,000 Fruit 72,000
Share of profit on Realisation:
Stem 3/6 12,040
Branch 2/6 8,024
Fruit 1/6 4,016
1,595,600 1,595,600

(ii) PARTNERS’ CURRENT AND CAPITAL ACCOUNTS

Stem Branch Fruit Stem Branch Fruit

K’000 K’000 K’000 K’000 K’000 K’000
Vehicle taken
over nil nil 72,000 Capital a/cs 360,000 240,000 120,000
Cash to settle 450,040 307,624 102,416 5,400
Current a/cs 78,000 59,600 50,400
Realisation
A/c (profit) 12,040 8,024 4,016
450,040 307,624 174,416 450,040 307,624 174,416

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 (iii) CASH AND BANK ACCOUNT
K’000 K’000
Balance b/d 48,000 Realisation a/c:
Realisation a/c Loan 144,000
Furniture and fittings 390,400 Payables 203,520
Motor vehicles 236,000 Dissolution expenses 8000
Inventory 222,000 Partners’ a/cs:
Receivables 319,200 Stem 450,040
Branch 307,624
Fruit 102,416
1,215,600 1,215,600

(b) The rule in Garner v. Murray (1904) states that where a partner becomes insolvent or bankrupt at
dissolution, the solvent partner(s) should bear the insolvent partner’s debts to the partnership pro
rata to capital amounts. This works out in such a way that the amount due from insolvent partner,
plus balance in cash account should exactly equal the amount due to solvent partner(s) to clear
the outstanding balance on closing capital account(s). (2 marks)

The presiding judge’s decision in this case was based on the doctrine of equity so that the
insolvent partner gets relief from former partners, given his crisis. This rule helps solve the
insolvent partner’s liability to the dissolving firm because he has no resources to meet this
obligation. (2 marks)

(Total 4 marks)

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Solution 5

(a)

Ratio Formulae Addidaz Phuma

Net Profit after tax 275 280

EPS  100 = 9.2 ngwee = 4.0 ngwee
No. of ordinary shares 3,000 7,000

Gross Profit 1,100 2,160

Gross profit %  100  100 =20.0%  100 =30.0%
Sales 5,500 7,200

Profit before int. & tax 490 475

ROCE  100  100 =11.8%  100 =6.3%
Capital employ ed 4,155 7,520

(b)

Ratio Addidaz Phuma Comment

Addidaz has a higher EPS than Phuma, and

from the shareholder’s perspective, Addidaz
would be considered a better investment of the
Earnings per Share 9.2 ngwee 4.0 ngwee
two. However, it would be useful to have EPS
figures for the previous year so that any trends
could be identified.

Phuma achieved a significantly higher gross

profit percentage than Addidaz. A number of
factors could be attributed to this, e.g. Phuma
may be operating a superior brand to Addidaz’s
and consequently is able to charge a premium
Gross profit percentage 20.0% 30.0%
price to its customers. Phuma may also be
cost effective in its production costs. On the
other hand, Addidaz may be incurring high
production costs resulting in higher selling
prices.

11.8% 6.3% Addidaz’s ROCE is nearly double that of

Return on Capital
Phuma. This could be that the former company

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Employed is better managed than the latter. Without
doubt, Addidaz’s return still represents a
reasonable return looking at the current
borrowing rates. However, more information
such as correct valuation of both companies’
assets may give more information on the two
companies.

(c) Limitations of accounting ratios:

1. No two companies are exactly the same, hence company performance analysis based purely
on accounting ratios may not be very useful.
2. Changes in accounting policies from year to year may produce misleading results and ratios.
3. Price changes from year to year may make comparisons difficult.
4. Accounting information used to prepare ratios is often historic, making ratios out dated.
5. Accounting information in form of published accounts is often summarised, making detailed
analysis difficult.
6. Different use of accounting policies may make direct comparison of companies difficult.

(d) Usefulness of accounting concepts:

(i) Going concern concept implies that the business will continue in operational existence for
the foreseeable future, and that there is no intention to put the company into liquidation or
make drastic cutbacks on the scale of operation.
This concept largely influences the assumptions made when evaluating particular statement
of financial position items, e.g. assets are normally shown at net realisable value because
they are expected to be kept in the business for future use.
(ii) The accruals concept requires that revenue and costs are recognised as they are earned or
incurred, rather than when money is received or paid.
This enables performance analysis possible because a firm’s revenue and costs are matched with
each other.
(iii) Accounting information must be reliable if it is to be useful. For accounting purposes, this
means that information should be free from material error and bias so that the user is able to
adduce faithful representation.

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(iv) Understandability of accounting information simply means that users must be able to
understand it. This means that accounting information should be simplified so as to portray
meaning even to non-accounting professionals.
(v) Comparability of accounting information both in terms of time and with other entities is of
vital importance. This is why use of accounting ratios would be very beneficial if the
underlying information in them is comparable in order to make informed decisions.

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Solution 6

(a) (1) IAS 41: Agriculture states that animals and plants should be recognised as assets in the
following circumstances:
(i) where the entity controls the asset as a result of past events. This could be evidenced
by formal ownership records such as title deeds, branding, etc.
(ii) it must be probable that the flow of economic benefits associated with the asset will
flow to the entity.
(iii) the cost or fair value of the asset to the entity can be measured reliably. Reliable
measurement can be through measures used by the markets.
(2 marks each for correct explanation of recognition criteria, maximum 6 marks)
(2) IAS 41: Agriculture requires that each year end, all biological assets should be measured at
fair value less estimated point of sale costs. The standard assumes that fair value,
compared with historic cost gives greater relevance, reliability, comparability and
understanding as a measure of future economic benefits.
IAS 41 however allows an alternative valuation method on initial recognition where fair value
can not be determined and market determined prices or values are not available.
(2 marks each for correct benchmark and allowed alternative method, maximum 4 marks)
(b) (i) Adjusting events: These are events that provide evidence of a condition that existed at the
reporting date.
(ii) Non-adjusting events: These are events that are indicative of conditions that arose after the
reporting date.
(iii) Accounting treatment
IAS 10 requires that the amounts recognised in the financial statements be adjusted to take
account of an adjusting event.
The standard also requires that disclosures be up-dated in the light of new information that
relate to a condition that existed at the reporting date.
IAS 10 prohibits the adjustment of amounts recognised in the financial statements to reflect
non-adjusting events after the reporting date. However, if a non-adjusting event is material
and its non-disclosure could influence the decisions of users, then an entity should disclose
the following:
(a) the nature of the event
(b) an estimate of its financial effect, or a statement that such an estimate cannot be
made.
Up to 3 marks for defining each type of event and how they should be treated
(maximum 6 marks).

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Kings Trade Limited
(c) (i) Receivables that were thought to be good at the Statement of Financial Position date will not
now be paid. This is an Adjusting event.
(ii) Kings trade has announced a bid to take over Maheu Ltd. This is a non adjusting event.
(iii) Some material errors have been discovered which show the financial statements are
incorrect. This is an Adjusting event.
(iv) The factory workforce at Kings trade has started strike action for an indefinite length of time.
This event is non adjusting.
Marking scheme: 1 mark for each correct answer (maximum 4 marks)
(d) The accounting framework forms an important basis for accounting in that through it, practicing and
reporting accountants are able to prepare financial statements and interpret economic events in the
most objective manner. This enhances the value of financial statements to varying users.
The conceptual framework refers to the generally accepted theoretical principles which form the
structure for financial reporting. Without this framework, there could be a haphazard way of
preparing financial reports.
The conceptual framework therefore tends to standardise accounting practice and theory.
The regulatory framework is the most important element in ensuring that relevant and reliable
financial reporting is done, and hence meeting the needs of users.
Accounting standards, for instance have helped achieve uniformity in accounts preparation and
reporting.
1 mark for general comment and 2 marks each for correct specific answer (maximum 5 marks)
END

90