CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 23 August 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) International Public Sector Accounting Standard (IPSAS) 24 – Presentation of Budget Information in Financial
Statements, requires a comparison of budget amounts and the actual amounts arising from execution of the budget to
be included in the financial statements of entities that are required to, or elect to, make publicly available their
approved budget(s), and for which they are, therefore, held publicly accountable.

With reference to International Public Sector Accounting Standard (IPSAS) 24:

(i) Differentiate between “original budget” and “final budget”. (2 marks)

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(ii) Explain the requirements of the standard where there are changes between the original and final budget.
(2 marks)
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(iii) Summarise TWO key disclosure requirements of the standard. (4 marks)
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(b) Citing TWO practical examples, explain the meaning and application of “predictive analytics”, in the context of
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financial analysis. (6 marks)

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(c) With reference to International Accounting Standard (IAS) 21 – The Effects of Changes in Foreign Exchange Rates,
describe the procedure for translating results and financial position of a foreign entity. (6 marks)
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(Total: 20 marks)
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QUESTION TWO
(a) Somalax Ltd. has its head office in town A and a branch in town B. Orders are received from customers by the
head office, processed, packaged and sold at a profit of 12% of the selling price. Finished products are sent to the
branch at selling price less 6%.

The following are extracts from the company as at 31 December 2022:

Head Office Branch

Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Bank balance 316,000 124,000
Branch office current account 720,000
Head office current account 562,080
Trade payables 800,000 80,000
Trade receivables 560,000 300,000
Other general expenses 800,000 80,000
Goods sent to branch 3,196,000 3,138,080
Sales 5,600,000 3,000,000
Purchase of material 8,000,000
Packaging material 880,000
Fixtures 320,000
Capital _________ 2,000,000 ________ ________
11,596,000 11,596,000 3,642,080 3,642,080

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 Additional information:
1. Fixtures are depreciated at the rate of 20% per annum on straight-line basis.
2. A provision is to be made for a bonus to the branch manager at the rate of 10% of the net profit after the
bonus.
3. Finished products whose selling price to the public was Sh.61,618,000 were dispatched by head office to
the branch on 30 December 2022 and were received on 10 January 2023.
4. The branch had sent cash amounting to Sh.100,000,000 to the head office on 28 December 2022. This
amount was received on 8 January 2023.
5. Materials which cost the head office Sh.20,000,000 were considered worthless.
6. There was a loss of packaging materials costing Sh.10,000,000 at the head office.
7. There was a shortage of products from the head office at the branch valued at Sh.26,000,000. This loss was
at invoice price by the head office to the branch.

Required:
(i) The head office, branch and combined statement of profit or loss for the year ended 31 December 2022.
(7 marks)

(ii) The head office, branch and combined statement of financial position as at 31 December 2022, in a
columnar format. (6 marks)

(b) Roy Ltd. has provided the following information to be used in inventory valuation:

Product Cost Realisable value Selling expenses

Sh.“million” Sh.“million” Sh.“million”
A 100 120 25

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B 50 60 5
C 75 85
.c 15
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Required:
Determine the value of closing inventory for Roy Ltd. in compliance with International Accounting Standard (IAS)
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2 - Inventories. (3 marks)
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(c) On 1 January 2022, a farmer had a herd of 100 cattle all of which were 2 years old. At this date, the fair value less
point of sale costs of the herd was Sh.10,000,000.
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On 1 July 2022, the farmer purchased 20 cattle (each two and a half years old) for Sh.60,000 each.
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As at 31 December 2022, three-year-old cattle were selling at the market for Sh.90,000 each. Market auctioneers
usually charge a sales levy of 2%.

Required:
(i) Valuation of cattle bought on 1 July 2022. (2 marks)

(ii) Valuation of cattle as at 31 December 2022. (1 mark)

(iii) Total charge to statement of profit and loss for the year ended 31 December 2022. (1 mark)
(Total: 20 marks)

QUESTION THREE
Pika Limited, a public limited entity intends to expand its operations by acquiring investments in other entities.
On 1 November 2022, Pika Limited secured a 75% equity interest in Shiba Limited under the following terms:
• An immediate cash payment at a fair value of Sh.13 per share on 1 November 2022.
• An issue of three ordinary shares of Sh.10 par value in Pika Limited for every five shares acquired in Shiba Limited.
The fair value of a Pika Limited share was Sh.13 per share at the date of acquisition. The share issue has not yet
been recorded by Pika Limited.

On the same date, Pika Limited also acquired a 30% equity shareholding in Amua Limited paying Sh.24 million in
cash.

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The following draft statements of financial position as at 30 April 2023 relate to Pika Limited and Shiba Limited:

Pika Limited Shiba Limited

Sh.“000” Sh.“000”
Non-current assets:
Property, plant and equipment 135,000 100,400
Investments: Shiba Limited (6 million shares at Sh.13 each) 78,000 -
Amua Limited 24,000 -
237,000 100,400
Current assets:
Inventory 28,400 12,100
Trade receivables 27,500 19,900
Cash and cash equivalents 10,600 6,800
Total assets 303,500 139,200

Equity and liabilities:

Equity:
Ordinary shares of Sh.10 each 160,000 80,000
Retained profit: As at 1 May 2022 62,400 12,800
For the year ended 30 April 2023 21,700 10,800
Total equity 244,100 103,600

Non-current liabilities:
10% bank loans 25,000 10,000
Deferred tax 3,700 3,100
Current liabilities:

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Trade payables 28,800 21,200
Current tax payable .c 1,900 1,300
Total equity and liabilities 303,500 139,200
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Additional information:
1. At the date of acquisition, the fair values of Shiba Limited’s net assets approximated their carrying values with the
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exception of plant whose fair value exceeded its carrying amount by Sh.10 million.
The plant had a remaining useful life of ten years at the date of Shiba Limited’s acquisition. The plant is being
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depreciated on a straight-line basis. The plant is still carried at its carrying value in Shiba Limited’s financial
statements.
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No fair value adjustments were necessary on the acquisition of investment in Amua Limited.
2. On 28 April 2023, Shiba Limited sent goods at an invoice price of Sh.7 million to Pika Limited which Pika Limited
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neither received nor recorded until 5 May 2023. Shiba Limited had marked up those goods by 25% on cost.
The agreed trade payables recorded in the books of Pika Limited before the above transactions were Sh.6 million.
3. Pika Limited’s policy is to measure the non-controlling interests at fair value at the date of acquisition. For this
purpose, the directors of Pika Limited considered Shiba Limited’s share price of Sh.12 per share to be appropriate.
4. Impairment tests performed on 30 April 2023 revealed that goodwill on acquisition of Shiba Limited had not been
impaired, but due to declining sales of Amua Limited, the value of investment in Amua Limited had been impaired
to the extent of Sh.2 million.
5. Amua Limited reported a profit after tax of Sh.4 million for the year ended 30 April 2023.
6. Assume all profits and losses of the three companies accrued evenly throughout the year.

Required:
(a) Calculate the value of goodwill arising on acquisition of Shiba Limited. (4 marks)

(b) Determine the value of investment in Amua Limited as at 30 April 2023. (4 marks)

(c) Prepare a consolidated statement of financial position for Pika Group as at 30 April 2023. (12 marks)
(Total: 20 marks)

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QUESTION FOUR
(a) Lilongwe Ltd. is a public listed company. Details of the company’s statement of financial position as at 31 March
2022 and 31 March 2023 are shown below together with other relevant information.

Statement of financial position as at 31 March:

2023 2022
Sh.“million” Sh.“million” Sh.“million” Sh.“million”
Non-current assets:
Property, plant and equipment 880 760
Intangible assets 400 510
1,280 1,270
Current assets:
Inventory 350 420
Trade receivables 808 372
Interest receivable 5 3
Short term deposits 32 120
Bank 15 1,210 75 990
Total assets 2,490 2,260
Share capital and reserves:
Ordinary shares of Sh.1 each 300 200
Reserves:
Share premium 60 -
Revaluation reserves 112 45
Retained earnings 1,098 1,270 1,165 1,210
Total equity 1,570 1,410

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Non-current liabilities:
12% loan note - .c 150
8% variable rate loan note 160 -
Deferred tax 90 250 75 225
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Current liabilities:
Trade payables 530 515
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Bank overdraft 125 -

Taxation 15 670 110 625
2,490 2,260
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Additional information:
1. Details of property, plant and equipment as at:
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31 March 2023 31 March 2022

Cost/ Depreciation Carrying Cost/ Depreciation Carrying
valuation amount valuation amount
Sh.“million” Sh.“million” Sh.“million” Sh.“million” Sh.“million” Sh.“million”

Land and
building
600 12 588 500 80 420
Plant 440 148 292 445 105 340
880 760

2. The company revalued the carrying value of land and building by an increase of Sh.70 million on 1 April
2022. On 31 March 2023, it transferred Sh.3 million from revaluation reserves to retained earnings relating
to depreciation on revaluation of buildings.
3. During the year, the company acquired new plant at a cost of Sh.60 million and sold some old plant for
Sh.15 million, incurring a loss of Sh.12 million.

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 4. The following is the statement of profit or loss (extract) for the year ended 31 March 2023:
Sh.“million” Sh.“million”
Operating loss (32)
Interest receivable 12
Finance costs (24)
Loss before tax (44)
Income tax repayment claim 14
Deferred tax charge (15) (1)
Loss for the period (45)
Finance costs are made of:
Interest expenses (18)
Penalty for early loan redemption (6)
24)
5. Short term deposits are deemed as cash equivalents.
6. Dividends of Sh.25 million were paid during the year.

Required:
Cash flow statement for Lilongwe Ltd. for the year ended 31 March 2023 in line with International Accounting
Standard (IAS) 7 - Cash Flow Statements. (14 marks)

(b) An item of plant and equipment in the books of Lima Ltd. had a carrying amount of Sh.6,000,000. It was classified
as held for sale on 30 September 2022. At that date, its fair value less costs to sell was estimated at Sh.5,500,000.
The asset was sold for Sh.5,550,000 on 30 November 2022. Lima Ltd.’s year end was 31 December 2022.

Required:

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(i) Describe how the classification as held for sale and subsequent disposal should be treated in the financial
statements of Lima Ltd. .c (2 marks)

(ii) State how your response in (b) (i) above would change if the carrying amount of the asset at 30 September
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2022 was Sh.5,000,000 and the rest of the amounts remained unchanged. (1 mark)
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(c) A company received legal advice that the most likely outcome of a court case brought by an employee is that it will
lose the case and have to pay Sh.10 million. The legal team estimates that there is an 80% chance of this, but that
there is also a 10% chance of having to pay Sh.12 million and a 10% chance of paying nothing.
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Required:
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Determine if a provision is necessary and the best estimate of provision, if any. (3 marks)
(Total: 20 marks)
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QUESTION FIVE
The following trial balance relates to Bidii Limited as at 31 December 2022:
Sh.“000” Sh.“000”
Property at cost (Building Sh.400 million) 600,000
Plant at cost 280,000
Motor vehicles at cost 70,000
Office equipment at cost 40,000
Accumulated depreciation (1 January 2022):
• Building 80,000
• Plant 111,160
• Motor vehicles 42,000
• Office equipment 15,000
Inventory (1 January 2022) 138,000
Purchases at cost 667,000
Distribution costs 44,000
Administrative expenses 93,500
Revenue 1,123,500
Trade receivables and trade payables 74,500 68,800
Bank balance 15,500
Deferred tax 32,400
Current tax 2,600
Bank interest 2,400
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 Sh.“000” Sh.“000”
Ordinary share capital (Sh.10 par value) 200,000
Share premium 50,000
Retained profit (1 January 2022) 223,640
Interim dividend paid 10,000
Suspense account 60,000
2,022,000 2,022,000

Additional information:
1. During the year ended 31 December 2022, Bidii Limited disposed of an item of plant for cash proceeds of
Sh.20,000,000 which were credited to the revenue account. No other accounting entry was made. The plant had
cost Sh.39,700,000 and had an accumulated depreciation of Sh.15,860,000.
Any gain/loss on disposal of plant should be included within the cost of sales.
It is the company’s policy to provide for full year’s depreciation in the year of asset purchase and none in the year of
disposal.
2. Depreciation on property, plant and equipment is to be provided and allocated as follows:
Asset Rate per annum Basis Allocation
• Building 2.5% Straight-line Administrative
• Plant 10% Reducing balance Cost of sales
• Motor vehicles 20% Straight-line Distribution
• Office equipment 12.5% Straight-line Administrative
3. It has been discovered that the former financial controller of Bidii Limited engaged in fraudulent financial reporting.
Sh.12,000,000 of trade receivables are non-existent and need to be written off. Of this amount, Sh.7,000,000 relates
to the year ended 31 December 2022, with the balance relating to prior periods.
4. The existing debit balance on the current tax in the trial balance represents the under/over provision for previous
year’s tax. A provision for current tax for the year ended 31 December 2022 of Sh.52,000,000 is required, together

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with a decrease to the deferred tax provision of Sh.3,000,000.
5. Inventory count on 31 December 2022 revealed the value of inventory at a cost of Sh.85,000,000.
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6. On 30 December 2022, the company directors invited the current shareholders to subscribe for a rights issue on the
basis of one new share for every five shares held at an exercise price of Sh.15 each. The cum rights price on the last
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day of trading was Sh.20 per share.

The proceeds from the fully subscribed rights issue were credited to the suspense account.
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Required:
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The following financial statements presented in a suitable format for publication:

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(a) Statement of profit or loss for the year ended 31 December 2022. (6 marks)
(b) Statement of changes in equity for the year ended 31 December 2022. (4 marks)
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(c) Statement of financial position as at 31 December 2022. (10 marks)

(Total: 20 marks)
…………………………………………………………………………

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 CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 26 April 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Revenue from rendering of services should be recognised by reference to the stage of completion of the transaction
at the balance sheet date.

Describe THREE conditions to be met before the above treatment can be applied. (3 marks)

(b) International Public Sector Accounting Standard (IPSAS) 1 – Presentation of Financial Statements, provides that the
presentation and classification of items in the financial statements shall be retained from one period to the next. The
standard however, provides exceptions to this principle.

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Discuss TWO exceptions to the above principle. .c (4 marks)

(c) Summarise FIVE limitations of ratios in analysing financial performance. (5 marks)

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(d) With reference to International Financial Reporting Standard (IFRS) – 5, Non-Current Assets Held for Sale and
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Discontinued Operations, describe the conditions that must be met for an asset to be classified as held for sale.
(8 marks)
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(Total: 20 marks)
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QUESTION TWO
Riva Limited operates in a fast moving goods sub-sector. During the year ended 31 March 2023, Riva Limited expanded its
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operations by acquiring a controlling interest in Sai Limited and a significant influence over the activities of Tutu Limited.
The following draft financial statements for the year ended 31 March 2023 relate to the three companies:

Statements of profit or loss for the year ended 31 March 2023:

Riva Limited Sai Limited Tutu Limited

Sh.“million” Sh.“million” Sh.“million”
Revenue 4,190 2,600 1,960
Cost of sales (2,730) (1,400) (1,370)
Gross profit 1,460 1,200 590
Distribution costs (300) (200) (190)
Administrative expenses (500) (400) (160)
Profit from operations 660 600 240
Investment income 40 20 30
Finance costs (80) (60) -
Profit before tax 620 560 270
Income tax expense (180) (160) (70)
Profit for the year 440 400 200

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Statements of financial position as at 31 March 2023:

Riva Limited Sai Limited Tutu Limited

Assets: Sh.“million” Sh.“million” Sh.“million”
Non-current assets:
Property, plant and equipment 2,070 1,290 950
Investments 1,600 - -
3,670 1,290 950
Current assets:
Inventory 530 390 240
Trade receivables 640 470 270
Financial assets at fair value through profit or loss 300 150 220
Cash and bank balances 360 200 320
Total current assets 1,830 1,210 1,050
Total assets 5,500 2,500 2,000
Equity and liabilities:
Equity:
Ordinary share capital 2,500 500 500
Share premium 500 200 200
Retained profit 1,020 800 500
Total equity 4,020 1,500 1,200
Non-current liabilities:
12.5% loan notes 640 480 -
Deferred tax 260 100 200
900 580 200
Current liabilities:

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Trade payables 420 330 520
Current tax 160 .c 90 80
580 420 600
Total equity and liabilities 5,500 2,500 2,000
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Additional information:
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1. On 1 July 2022, Riva Limited acquired an 80% ordinary shareholding in Sai Limited for a cash consideration of
Sh.1,100 million. The fair value of assets and liabilities of Sai Limited were equal to their carrying amounts at the
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date of acquisition.
2. The group policy is to measure the non-controlling interests at their proportionate share of net assets of the
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subsidiary at the date of acquisition.

3. On 1 January 2023, Riva Limited acquired a 40% ordinary shareholding in Tutu Limited for a cash consideration of
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Sh.500 million.
4. During the post-acquisition period, Riva Limited sold goods to Sai Limited for Sh.300 million. Riva Limited
reported a 20% profit margin on this sale. Half of these goods remained in the ending inventory of Sai Limited at the
year end of 31 March 2023.
5. Included in the trade receivables of Riva Limited was Sh.80 million due from Sai Limited. In the books of Sai
Limited, the amount due to Riva Limited was shown at Sh.60 million because Sai Limited had remitted Sh.20
million but Riva Limited had not recorded the remittance.
6. On 1 October 2022, Riva Limited sold an assembly plant to Sai Limited for Sh.400 million reporting a 25% profit
margin on the selling price and netted off the profit against its cost of sales.
The group charges depreciation on plant at the rate of 20% per annum on cost on full year basis in the year of asset
purchase and none in the year of disposal.
7. Impairment tests carried out on 31 March 2023 revealed that neither the goodwill on acquisition nor the investment
in associate had been impaired during the year.
8. None of the group companies paid dividends during the year to 31 March 2023.

Required:
(a) Consolidated statement of profit or loss for the year ended 31 March 2023. (8 marks)

(b) Consolidated statement of financial position as at 31 March 2023. (12 marks)

(Total: 20 marks)

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QUESTION THREE
The following trial balance was prepared by Salama Ltd. as at 31 December 2022:
Sh.“000” Sh.“000”
Ordinary share capital (Sh.10 each) 20,000
8% redeemable preference shares 12,000
6% debentures 10,000
Revaluation reserve 3,400
Retained earnings (1 January 2022) 14,160
Revenue 283,460
Inventory (1 January 2022) 12,400
Purchases 147,200
Distribution costs 22,300
Administrative expenses 34,440
Interest paid on debentures 300
Interim dividends paid: - Ordinary 2,000
- Preference 480
Investment income 1,500
Leasehold building 56,250
Plant and equipment at cost 55,000
Furniture and fittings at cost 35,000
Investment 34,500
Accumulated depreciation:
Leasehold building 18,000
Plant and equipment 12,800
Furniture and fittings 9,600

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Accounts receivable 35,700
Bank overdraft .c 1,680
Accounts payable 17,770
Deferred tax 5,200
Suspense account ______
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26,000
435,570 435,570
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Additional information:
1. The inventory as at 31 December 2022 was valued at Sh.16 million. However, there were some goods which were
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considered obsolete with a net realisable value of Sh.400,000 and a cost of Sh.450,000 with a net replacement value
of Sh.350,000.
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2. The 6% debentures were issued on 1 July 2022. Interest on debentures is payable semi-annually.
3. The policy of the company in relation to the depreciation of its assets is as follows:
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Asset Rate per annum Method

• Leasehold building 4% On straight line basis
• Plant and equipment 20% On straight line basis
• Furniture and fittings 4% On reducing balance basis
The plant and equipment had a residual value of Sh.5 million.
Depreciation is classified as cost of sales expense except for the depreciation on furniture and fittings which is
classified as administrative expense.
4. The taxable timing differences were Sh.24 million while the deductible timing differences were Sh.10.5 million
during the year.
5. The corporation tax of Sh.21.4 million is to be provided for the year.
6. The suspense account represents two components:
• Proceeds from sale of plant of Sh.16 million whose cost was Sh.20 million and an accumulated
depreciation of Sh.2.5 million.
• Sh.10 million being a bonus issue of shares.
7. The directors propose to pay a final dividend of Sh.1.50 per share on the outstanding shares at the year end.
8. The tax rate was 30%.
Required:
(a) Statement of profit or loss for the year ended 31 December 2022. (8 marks)
(b) Statement of changes in equity for the year ended 31 December 2022. (4 marks)
(c) Statement of financial position as at 31 December 2022. (8 marks)
(Total: 20 marks)
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QUESTION FOUR
Baraka and Faulu were in partnership sharing profits and loses equally until 30 September 2021 when they decided to convert
the partnership into a limited company; Bafa Ltd. The conversion of the books of account was however not completed.

The following trial balance was extracted from the books of account as at 30 September 2022:
Sh.“000” Sh.“000”
Revenue 780,000
Production costs 450,000
Distribution costs 42,000
Administrative expenses 156,000
Inventory – 30 September 2021 109,200
Interest paid on loan stock 18,000
Income tax 1,200
Dividends paid 12,000
Property, plant and equipment 342,000
Accumulated depreciation – 30 September 2021 93,540
Suspense account 7,200
Trade receivables 296,000
Cash and cash equivalents 80,740
Trade payables 72,000
Provisions (Legal claim) 24,000
Loan stock 240,000
Lease rentals 48,000
Deferred tax 36,000
Net profit to 30 September 2021 40,000
Current account - Baraka 16,000

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- Faulu 4,000
Drawings to 30 September 2021 - Baraka 28,000 .c
- Faulu 12,000
Capital accounts - Baraka 160,000
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- Faulu ________ 120,000

1,593,940 1,593,940
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Additional information:
1. Closing inventory as at 30 September 2022 was valued at Sh.132 million.
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2. On 1 October 2021, the company leased some equipment to boost production. The lease was for five years. The
lease rental payments were Sh.24 million payable semi-annually in arrears. The fair value of the equipment was
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Sh.186 million. Depreciation is to be charged on straight line basis and allocated to cost of sales. The interest rate
implicit in the lease is at 5% per half year.
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3. The suspense account represents sales proceeds from some items of plant and equipment which had cost Sh.36
million and which were disposed of during the year. The accumulated depreciation for the disposed items as at 30
September 2021 was Sh.27 million. Any gain or loss on disposal was to be adjusted in the depreciation expense
account.
4. The income tax amount of Sh.1.2 million included in the trial balance was the estimated tax as at 30 September
2021. The current year’s tax is estimated at Sh.9 million. In addition, a deferred tax liability of Sh.36 million was
provided for as at 1 October 2021. As at 30 September 2022, temporary differences were Sh.168 million. The tax
rate is 30%.
5. A legal claim of Sh.60 million was lodged against the company during the year by a customer.

The directors estimated that there was a 40% possibility of the claim being successful and had made a provision of
Sh.24 million which was included in the administrative expenses.
6. Property, plant and equipment as at 30 September 2022 comprised:
Land Building Plant, equipment and furniture
Sh.“000” Sh.“000” Sh.“000”
Cost 72,000 108,000 162,000
Accumulated depreciation - 27,000 66,540

Useful life (in years) - 50 4

7. Depreciation is to be provided on a straight-line basis and apportioned as follows:
Cost Percentage (%)
Cost of sales 80
Distribution cost 10
Administrative expenses 10
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8. No entries were made to record the conversion of the partnership into a limited company. The assets were taken over
by the company on 1 October 2021 at their book values except land which was revalued to Sh.80 million. The
company issued to the partners 32 million shares of Sh.10 each in settlement of their outstanding capital account
balances.

Required:
(a) Statement of profit or loss for the year ended 30 September 2022. (8 marks)

(b) Statement of financial position as at 30 September 2022. (12 marks)

(Total: 20 marks)

QUESTION FIVE
(a) In the context of International Accounting Standard (IAS) 12, Income Taxes:

(i) Explain the difference between “taxable temporary differences” and “deductible temporary differences”.
(2 marks)

(ii) Suggest how the tax base for “assets”, “revenue received in advance” and “other liabilities” can be
determined. (6 marks)

(iii) A deferred tax liability is generally recognised for all taxable differences. There are however exceptions to
this rule.

Summarise TWO exceptions to the above rule. (4 marks)

(b) BXL Manufacturers Ltd., a small firm engaged in the production of fertilizer, purchased an item of equipment for

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Sh.12 million on 1 July 2018. The company provides depreciation on equipment on a straight-line basis at the rate of
25% per annum. During the four years from 1 July 2018 to 30 June 2022, the profit after tax and allowed wear and
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tear charges for tax purposes were as follows:
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Period Profit after tax Allowable wear and tear charges

Sh.“000”
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1 July 2018 – 30 June 2019 2,400 40% on cost

1 July 2019 – 30 June 2020 2,700 30% on cost
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1 July 2020 – 30 June 2021 2,850 20% on cost

1 July 2021 – 30 June 2022 2,550 10% on cost
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Corporation tax for the period of four years remained at the rate of 30%.
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Required:
Compute for each of the years ended 30 June 2019, 2020, 2021 and 2022:

(i) Taxable profit. (4 marks)

(ii) Deferred tax. (4 marks)

(Total: 20 marks)
…………………………………………………………………………

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 CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 7 December 2022. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) In the context of financial assets and financial liabilities:

(i) Provide an overview of what comprises a “financial asset” and a “financial liability”. (2 marks)

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(ii) With reference to the measurement and recognition of financial assets, recommend guidance to preparers of
financial statements who reclassify financial assets under the following categories:
a.
• Reclassification of a financial asset out of the amortised cost measurement category and into the face
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value through profit or loss measurement category. (2 marks)

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• Reclassification of a financial asset out of the amortised cost measurement category and into the fair
value through other comprehensive income measurement category. (4 marks)
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(b) With reference to International Financial Reporting Standard (IFRS) 11 – Joint Arrangements:
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(i) Summarise TWO characteristics of a joint arrangement. (2 marks)

(ii) Describe the TWO types of joint arrangements. (2 marks)

(iii) Explain the salient provisions on what a joint operator recognises in relation to its interest in a joint
operation. (2 marks)

(c) With reference to International Public Sector Accounting Standard (IPSAS) 19 – Provisions, Contingent Liabilities
and Contingent Assets:

(i) Distinguish between “provisions” and “contingent liabilities”. (2 marks)

(ii) Summarise the circumstances for recognition of a provision. (2 marks)

(iii) Indicate the accounting treatment for “contingent liabilities” and “contingent assets”. (2 marks)
(Total: 20 marks)

QUESTION TWO
Marula Farmers Cooperative Society Ltd. deals in the marketing of two brands of coffee; Safi and Mzuri on behalf of the
members. As per the society’s bylaws, the society is allowed to retain 20% of sales from Safi and Mzuri for operations and
pay the balance to the members.

The following trial balance was extracted from the books of the society as at 31 December 2021:

Sh.“000” Sh.“000”
Safi - Marketing expenses 640
- Processing materials 860
- Processing wages 900
Mzuri - Marketing expenses 150
- Processing materials 320
- Processing wages 30
Loans to members 972,340
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 Sh.“000” Sh.“000”
Dividends from investments 470
Accrued rent 4,950
Sundry provision 8,930
Appropriation account 6,050
Revaluation reserve 750
Statutory reserve fund 13,740
Entrance fee 300
Share capital 900,000
Members’ deposits 64,650
Sundry creditors 3,410
Bank overdraft 6,150
Interest on loans to members 35,890
Travelling expenses - Staff 80
- Committee members 100
Bank charges 200
Bank interest 810
Salaries and wages 2,290
Committee education 1,000
Committee sitting allowance 1,110
Printing and stationery 2,050

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General meeting expenses 500

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Members’ education 1,500
Entertainment
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50
Legal fees 400
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Cash in hand 540

Wakulima Bank Ltd. savings 6,780
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Investment in Wakulima Bank Ltd. 26,550

Receivables - Members 2,690
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Receivables - Non-members 22,500

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Office equipment 900 ________

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1,045,290 1,045,290

Additional information:
1. Bora Limited markets Safi and Mzuri brands for Marula Society. On 31 December 2021, Bora Limited sold Safi and
Mzuri brands for 175,000 United States (US) dollars and 115,300 US dollars respectively. Bora Limited remitted the
above amounts to Marula Farmers’ Wakulima Bank account on 15 January 2022. Marula Farmers Cooperative
Society does not maintain a US dollar account in Wakulima Bank.
2. The exchange rates for the two currencies were as shown below on the respective dates:

Sh./1 US dollar
31 December 2021 105
15 January 2022 100
3. Audit fee of Sh.6,000,000 is to be provided for.
4. Staff salaries and wages amounting to Sh.3,200,000 had not been paid as at 31 December 2021.
5. Interest on members deposits is to be provided at Sh.6,086,000.
6. As per the relevant Ministry regulations, cooperative societies are required to transfer 20% of their net earnings to a
statutory reserve.

Required:
Prepare the following financial statements for Marula Cooperative Society Ltd. for the year ended 31 December 2021:

(a) Safi brand marketing account, showing the profit or loss. (3 marks)

(b) Mzuri brand marketing account, showing the profit or loss. (3 marks)

(c) Statement of profit or loss for the year ended 31 December 2021. (6 marks)

(d) Statement of financial position as at 31 December 2021. (8 marks)

(Total: 20 marks)

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QUESTION THREE
(a) On 1 January 2022, H Limited acquired 80% of the 4 million, Sh.10 ordinary shares of S Limited issued at par
value.
The acquisition consideration comprised of three new ordinary shares issued by H Limited in exchange for every
five shares acquired in S Limited.
Additionally, H Limited will pay further consideration on 31 December 2022 of Sh.11 per share acquired. H
Limited’s cost of capital is 10% per annum and the discount factor at 10% for one year is 0.9091.
At the date of acquisition, the fair values of ordinary shares in H Limited and S Limited were Sh.15 and Sh.12
respectively.
The following statements of profit or loss for the year ended 30 September 2022, relate to the two companies:
H Limited S Limited
Sh.“000” Sh.“000”
Revenue 546,000 420,000
Cost of sales (378,000) (300,000)
Gross profit 168,000 120,000
Distribution costs (36,000) (24,000)
Administrative expenses (42,000) (28,000)
Profit from operations 90,000 68,000

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Investment income 6,000 -

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Finance costs (4,000) (2,000)
Profit before tax 92,000 a. 66,000
Income tax expense (30,000) (24,000)
Profit for the year 62,000 42,000
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Additional information:
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1. At the date of acquisition, the fair value of S Limited’s net assets approximated their carrying values with
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the exception of an item of plant and equipment which had a fair value of Sh.24 million above its carrying
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amount. The remaining economic useful life of the plant and equipment at the date of acquisition was six
years. Depreciation is charged to cost of sales.
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2. Sales from S Limited to H Limited in the post-acquisition period amounted to Sh.30 million. S Limited
reported a gross profit margin of 25% on these sales. H Limited’s inventory includes one fifth (⅕) of these
goods as at 30 September 2022.
3. H Limited’s policy is to value the non-controlling interests at fair value at the date of acquisition. For this
purpose, S Limited’s share price at acquisition date can be deemed to be representative of the fair value of
the shares held by the non-controlling interest.
4. H Limited’s investment income is dividend received from its investment in a 40% owned associate which it
has held for several years. The associate reported a profit after tax of Sh.30 million for the year ended
30 September 2022.
5. As at 30 September 2022, no impairment of goodwill was considered necessary.
6. Assume that profits and losses accrued evenly throughout the year.
7. As at 1 October 2021, the retained earnings of S Limited were Sh.16 million.
Required:
(i) Calculate the goodwill arising on the acquisition of S Limited. (4 marks)
(ii) Consolidated statement of profit or loss for H Group for the year ended 30 September 2022. (8 marks)
Note: All workings should be done to the nearest Sh.“000”.
(b) Sayari Limited obtained a 10% loan note amounting to Sh.24 million on 1 January 2021 to finance the construction
of a new factory.
As the funds were not all required immediately, Sayari Limited invested Sh.10 million in 6% bonds until 31 May
2021. Construction of the factory began on 1 March 2021. However, due to an unexpected shortage of skilled
labour, the project ceased during the months of July and August 2021.
By 31 December 2021, the project was not complete.
Required:
Explain, with suitable calculations, the accounting treatment of interest on costs on the loan note in the financial
statements of Sayari Limited for the year ended 31 December 2021 in accordance with International Accounting
Standard (IAS) 23 “Borrowing Costs”. (8 marks)
(Total: 20 marks)
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QUESTION FOUR
(a) Ratio analysis has over time proven to be a useful financial tool for decision making. However, reliance on ratios for
decision making has inherent limitations.

Required:
Citing SIX limitations, justify the above statement. (6 marks)

(b) The following draft financial statements were extracted from the books of Mrima Limited as at 31 December:

Statement of profit or loss for the year ended 31 December:

2021 2020
Sh.“000” Sh.“000”
Sales 1,167,800 972,600
Operating profit 41,340 34,476
Finance cost (3,968) (3,968)
Profit before tax 37,372 30,508
Taxation (14,052) (11,468)
Profit for the period 23,320 19,040
Dividends paid (4,800) (4,480)
Retained profit for the year 18,520 14,560

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Retained profit brought forward 61,640 47,080

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Retained profit brought forward 80,160 61,640
a.
Statement of financial position as at 31 December:
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2021 2020
Non-current assets: Sh.“000”
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Sh.“000”
Equipment 25,400 9,990
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Current assets:
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Inventory 100,910 80,290

Trade receivables 86,740 80,420
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Bank balances 11,580 24,184

199,230 184,894
Total assets 224,630 194,884
Equity and liabilities:
Capital and reserves:
Shares of Sh.20 each 19,840 19,840
Retained earnings 80,160 61,640
100,000 81,480
Non-current liabilities:
10% debentures 39,680 39,680
Current liabilities:
Trade payables 74,460 65,208
Taxation 6,520 4,946
Accruals 3,970 3,570
84,950 73,724
Total equity and liabilities 224,630 194,884

Required:
Calculate for each year, TWO ratios for each of the following user groups, which are of particular significance to
them:

(i) Shareholders. (4 marks)

(ii) Trade payables. (2 marks)

(iii) Internal management. (2 marks)

(c) Comment on the changes between the two years as reflected in the ratios calculated in (b) above. (6 marks)
(Total: 20 marks)

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QUESTION FIVE
The following draft financial statements were extracted from the financial records of Maalum Limited, a public limited entity,
as at 30 April 2022 with comparatives for the year ended 30 April 2021.

Statements of financial position as at 30 April:

2022 2021
Assets: Sh.“000” Sh.“000”
Non-current assets:
Property, plant and equipment 36,300 27,450
Intangible assets 6,750 6,150
43,050 33,600
Current assets:
Inventory 13,300 11,445
Trade receivables 9,230 7,080
Cash and cash equivalents 900 510
Total assets 66,480 52,635
Equity and liabilities:
Share capital and reserves:
Ordinary share capital (Sh.10 par value) 7,500 6,000
Share premium 1,350 1,050
Revaluation surplus 2,550 -

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Retained earnings 28,065 25,980

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Total equity 39,465 33,030
Non-current liabilities:
a.
10% loan notes (2025) 8,250 5,250
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Government grants 3,150 2,400

Deferred tax 1,920 810
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Current liabilities:
Trade payables 10,200 7,770
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Current tax 2,685 2,775

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Government grants 810 600

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Total equity and liabilities 66,480 52,635

Statement of profit or loss and other comprehensive income for the year ended 30 April 2022:

Sh.“000”
Revenue 54,975
Cost of sales (43,860)
Gross profit 11,115
Other operating income – government grant 750
11,865
Other operating expenses (2,970)
Profit from operations 8,895
Finance costs (705)
Profit before tax 8,190
Income tax expense (2,655)
Profit for the year 5,535
Other comprehensive income:
Gain on property revaluation 2,550
Total comprehensive income for the year 8,085

Additional information:
1. Maalum Limited acquired some new plant during the year to 30 April 2022 at a cost of Sh.1,800,000 from a finance
company. An arrangement was made at the date of acquisition for the liability for the plant to be settled by Maalum
Limited issuing at par a 10% loan note dated 2025 to the finance company. The value by which the loan note
exceeded the liability for the plant was received from the finance company in cash.
2. The company’s motor vehicle haulage fleet with a cost of Sh.2,630,000 and accumulated depreciation of
Sh.1,165,000 was disposed of during the year for cash proceeds of Sh.1,810,000. The profit on disposal has been
included in the other operating expenses.
3. Depreciation charged on property, plant and equipment during the year was Sh.5,490,000 and was included in the
cost of sales.
4. Intangible assets were amortised during the year and amortisation charged to profit or loss amounted to Sh.540,000.
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5. During the year ended 30 April 2022, Maalum Limited made a bonus issue of ordinary shares of one new share for
every ten shares held utilising the share premium account.

Required:
A statement of cash flows for Maalum Limited for the year ended 30 April 2022 using the indirect method in accordance
with International Accounting Standard (IAS) 7 “Statement of Cash Flows”. (Total: 20 marks)
…………………………………………………………………………

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 CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 3 August 2022. Morning paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) A number of developing countries are engaged in exploration of minerals to boost their economic empowerment.

Your company, an international mineral exploration firm has been contracted by one of the developing countries on
a mineral exploration and evaluation engagement.

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Required: .c
Advise the Board of Management of the company on the following:
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(i) The relevant International Financial Reporting Standard (IFRS) for accounting for exploration of mineral
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resources and the scope of the standard. (4 marks)

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(ii) The key provisions of the IFRS in (a) (i) above on impairments of assets used in exploration activities.
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(3 marks)
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(iii) Disclosure requirements in the financial statements under the IFRS. (3 marks)

(b) International Public Sector Accounting Standard (IPSAS) 1 - Presentation of Financial Statements provides that
“financial statements shall present fairly the financial position, financial performance and cash flows of an entity”.

In the context of the above statement:

(i) Describe what “fair presentation of financial statements” entails. (5 marks)

(ii) Explain the disclosure requirements where an entity departs from a requirement of the IPSAS. (5 marks)
(Total: 20 marks)

QUESTION TWO
Kuja Limited has owned 70% of Twende Limited’s equity share capital since 1 April 2017.

The acquisition consideration consisted of cash amounting to Sh.3,600 million paid on 1 April 2017. The retained earnings
balance of Twende Limited at the date of acquisition stood at Sh.870 million and had no other reserves.

The draft financial statements for the two group companies for the year ended 31 March 2022 were as set out below:

Statement of profit or loss and other comprehensive income for the year ended 31 March 2022:

Kuja Limited Twende Limited

Sh.“million” Sh.“million”
Revenue 5,100 1,920
Cost of sales (4,050) (1,110)
Gross profit 1,050 810
Distribution costs (240) (210)
Administrative expenses (480) (230)
Operating profit 330 370

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 Sh.“million” Sh.“million”
Investment income 160 -
Finance costs (85) (125)
Profit before tax 405 245
Income tax expense (175) (125)
Profit for the year 230 120
Other comprehensive income:
Gain on property revaluation 180 100
Total comprehensive income for the year 410 220

Statement of financial position as at 31 March 2022:

Kuja Limited Twende Limited
Sh.“million” Sh.“million”
Assets:
Non-current assets:
Property, plant and equipment 5,300 5,050
Investment 4,500 -
9,800 5,050
Current assets:
Inventory 2,840 1,560
Trade receivables 2,480 1,860
Cash and cash equivalents 1,780 1,030
Total assets 16,900 9,500

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Equity and liabilities: .c
Equity:
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Ordinary share capital 5,000 3,000

Share premium 1,000 -
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Revaluation surplus 1,550 700

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Retained earnings 4,170 2,530

Total equity 11,720 6,230
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Non-current liabilities:
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10% loan notes 1,700 1,050

Deferred tax 740 570
Current liabilities:
Trade payables 2,340 1,300
Current tax 400 350
Total equity and liabilities 16,900 9,500

Additional information:
1. A fair value exercise carried out on 1 April 2017 concluded that the carrying amounts of Twende Limited’s net
assets approximated their fair values with the exception of an item of plant and equipment which had a carrying
amount of Sh.100 million below its fair value. At 1 April 2017, the plant and equipment had a remaining economic
useful life of ten years. Depreciation is charged to cost of sales.
2. It is the group’s policy to measure the non-controlling interests at fair value at the date of acquisition. The fair value
of the non-controlling interest in Twende Limited on 1 April 2017 was estimated at Sh.1,370 million.
3. Kuja group adopts revaluation model to measure its property, plant and equipment as permitted by International
Accounting Standard (IAS) 16 “Property, Plant and Equipment”. Revaluation surplus reported by Twende Limited
relates to the revaluations conducted in the post-acquisition period.
4. During the year ended 31 March 2022, Twende Limited sold goods worth Sh.200 million to Kuja Limited. Twende
Limited reports a gross profit markup of 25% on all its sales. Kuja Limited still had 25% of these goods in its
inventory as at 31 March 2022.
5. At 31 March 2022, Twende Limited’s records showed a receivable due from Kuja Limited of Sh.140 million which
corresponded with the balance in Kuja Limited’s trade payables.
6. An impairment review conducted on 31 March 2022 revealed that goodwill arising on acquisition of Twende
Limited was impaired by 10%. No impairment loss had been reported in prior years.

Required:
(a) Group statement of profit or loss and other comprehensive income for the year ended 31 March 2022. (8 marks)

(b) Group statement of financial position as at 31 March 2022. (12 marks)

(Total: 20 marks)
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QUESTION THREE
The income statement of Coaster Limited, a company operating in the small and medium enterprises (SME) sector for the
year ended 31 December 2021 together with the comparative statements of financial position as at 31 December 2021 and
31 December 2020 are shown below:

Income statement for the year ended 31 December 2021:

Sh.“000” Sh.“000”
Revenue 6,500
Cost of sales (3,100)
Gross profit 3,400
Other income 8,000
11,400
Expenses:
Distribution costs 5,200
Administrative costs 5,660 (10,860)
Operating profit 540
Interest receivable 80
Interest payable (520)
Profit before tax 100
Net income tax credit 100
Profit for the year after tax 200

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Statement of financial position as at 31 December:
Assets: 2021 2020
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Non-current assets: Sh.“000” Sh.“000”
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Property, plant and equipment at cost 42,000 50,400

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Less accumulated depreciation (20,800) (18,800)

21,200 31,600
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Current assets:
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Inventory 7,100 5,700

Trade receivables 7,200 6,200
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Insurance claim 2,000 1,400

Cash at bank 1,700 -
18,000 13,300
Total assets 39,200 44,900
Equity and liabilities:
Captial and reserves:
Ordinary shares of Sh.10 each 12,000 12,000
Retained profit 5,100 3,200
Revaluation reserve - 1,700
17,100 16,900
Non-current liabilities:
Finance lease obligations 4,000 3,400
10% debentures 1,600 -
12% bank loan - 8,000
Deferred tax 400 1,000
Government grants 2,800 1,800
8,800 14,200
Current liabilities:
Trade payables 10,100 7,900
Government grants 1,200 800
Finance lease obligations 1,800 1,600
Current tax 200 2,400
Bank overdraft - 1,100
13,300 13,800
Total capital and liabilities 39,200 44,900

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Additional information:
1. Interest expense includes finance lease interest.
2. During the year, Coaster Limited sold its factory at its fair value of Sh.24,000,000. At the date of sale, it had a
carrying value of Sh.14,800,000 based on previous revaluation of Sh.17,200,000 less depreciation of Sh.2,400,000
since the revaluation. The profit on the sale of the factory has been included in other income. The surplus on the
revaluation surplus related entirely to the factory. No other disposals of non-current assets were made during the
year.
3. Plant acquired under finance lease during the year was for Sh.3,000,000. Other purchases during the year qualified
for Government grants of Sh.1,900,000. Amortisation of government grants has been credited to the cost of sales.
4. The insurance claim relates to the flood damage to the company’s inventories which occurred in April 2020. The
original estimate has been revised during the year after negotiation with the insurance company. The claim is
expected to be settled in the near future.

Required:
Statement of cash flows for the year ended 31 December 2021 in conformity with the requirements of International
Accounting Standard (IAS) 7 “Statement of Cash Flows”. (20 marks)

QUESTION FOUR
(a) On 1 January 2019, Brakewood Limited entered into a contract to lease an item of plant and equipment from a
supplier for a three-year period. The terms of the lease were that Brakewood Limited was to pay Sh.500,000 each
year with the payments commencing on 31 December 2019.

Initial direct costs incurred on the lease amounted to Sh.30,000 and were paid for by Brakewood Limited. The plant

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and equipment had a remaining economic useful life of five years at the inception of the lease. The lease contract did
not contain any purchase option for the lessee.
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Brakewood Limited can borrow at a rate of 10% a year.

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Required:
Analyse the accounting treatment of the above lease transactions from the inception and for the three-year period of
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the lease contract. (10 marks)

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(b) S and M are advocates operating under the name SM Advocates. The firm’s trial balance for the year ended 30 June
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2022 is as shown below:

Sh.“000” Sh.“000”
Costs charged to clients 750,000
Work-in-progress (1 July 2021) 110,400
Clients: for moneys held on their behalf 74,400
Creditors 81,600
Receivables 234,000
Office expenses 25,500
Furniture, fittings and library books 135,000
Cash at bank: Client account 74,400
Office account 167,100
Postage, telephone and internet bills 54,600
Printing and stationery 105,000
Rent and rates 180,000
Salaries to staff 216,000
Drawings 180,000
Disbursement on behalf of clients 36,000
Capital account ________ 612,000
1,518,000 1,518,000
Additional information:
1. It is estimated that debts amounting to Sh.16,500,000 are uncollectable and should be written off.
2. Depreciation should be provided at the rate of 20% per annum on the book value of the furniture, fittings
and library books.
3. The uncompleted work on 30 June 2022 was valued at Sh.70,500,000.
Required:
(i) Statement of profit or loss for the year ended 30 June 2022. (5 marks)
(ii) Statement of financial position as at 30 June 2022. (5 marks)
(Total: 20 marks)
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QUESTION FIVE
(a) Discuss the business concept of “triple bottom line” as applied in financial reporting. (8 marks)
(b) Dragon Limited is a public entity which has grown in recent years by acquiring established business entities.
The directors of Dragon Limited have identified two potential entities targeted for a takeover. The directors believe
that the shareholders of the two target companies would be receptive to a takeover.
As a pre-requisite to the takeover decision, the directors have tasked a firm of consultants to carry out a cross-
sectional analysis of the financial statements of the two potential target companies which operate in the same
industry sector.
The financial statements of the two entities as at 30 April 2022 are shown below:
Statement of profit or loss for the year ended 30 April 2022:
Able Limited Ceda Limited
Sh.“000” Sh.“000”
Revenue 87,500 140,000
Cost of sales (66,500) (114,800)
Gross profit 21,000 25,200
Distribution costs (1,495) (2,710)
Administrative expenses (2,880) (5,340)
Operating profit 16,625 17,150
Finance costs (875) (3,150)
Profit before tax 15,750 14,000

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Income tax expense (3,150) (3,500)
Profit for the year 12,600 10,500
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Statement of financial position as at 30 April 2022:

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Able Limited Ceda Limited

Sh.“000” Sh.“000”
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Assets:
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Non-current assets:
Property 9,800 10,500
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Owned plant 7,000 8,050

Right-of-use asset - 17,500
16,800 36,050
Current assets:
Inventory 5,600 11,900
Trade receivables 7,350 17,850
Bank 3,850 700
Total assets 33,600 66,500
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value) 3,500 7,000
Revaluation surplus 1,750 3,150
Retained earnings 5,600 9,450
Total equity 10,850 19,600
Non-current liabilities:
Lease liability - 14,700
10% loan notes 15,750 17,500
Current liabilities:
Trade payables 4,375 7,350
Lease liability - 2,450
Current tax 2,625 4,900
Total equity and liabilities 33,600 66,500

Required:
(i) Common size statements of profit or loss for the two entities for the year ended 30 April 2022. (5 marks)
(ii) Common size statements of financial position as at 30 April 2022. (5 marks)
(iii) Advise the directors of Dragon Limited on the best company for take over. (2 marks)
(Total: 20 marks)
…………………………………………………………………………
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 CPA INTERMEDIATE LEVEL
PIOT PAPER
FINANCIAL REPORTING AND ANALYSIS

December 2021. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

QUESTION ONE
Vista Limited has prepared the following trial balance as at 30 September 2021:

Debit Credit
Sh.“000’ Sh.“000”
Land at valuation 140,000
Buildings at cost 300,000
Furniture and equipment at cost 131,250
Motor vehicles 120,000
Accumulated depreciation at 30 September 2020:
Buildings 48,200
Furniture and equipment 87,050
Motor vehicles 22,000
Investment property 24,600
Rental income received 2,400
Sales 473,250
Cost of sales 179,550
Loan stock interest paid 5,000
Trade receivables 42,600
Distribution costs 15,700
Administrative expenses 30,750
Other operating expenses 45,000
Dividends paid 80,000
Installment tax paid 22,500
Bank and cash 7,950
Inventories as at 30 September 2021 41,100
Trade payables 19,800
Ordinary shares of Sh.50 each, fully paid 200,000
Share premium 119,400
Land Revaluation Reserve 21,000
Retained earnings as at 30 September 2020 130,100
10% Loan stock (Maturity date of 2025) 50,000
Deferred tax liability 12,800
1,186,000 1,186,000

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 The following additional information is relevant:

1. Land is to be valued upwards by Sh.3 million.

2. Depreciation rates are as follows, with their respective classifications:
Asset Rate on Cost Category
Buildings 2% Administration cost
Furniture & Equipment 20% Administration cost
Motor vehicles 25% 20% Cost of Sales
80% Distribution

3. The investment property is being accounted for using the fair value model as per IAS 40, with the fair value being
Sh.25 million as at 30th September 2021.
4. The company has assessed the expected credit loss on trade receivables and has summarized the following details:

Amount Sh.”000”’ Probability of default

5%
26,600
20%
12,600
50%
3,400
The expected credit loss is classified as an administrative expense.
5. Included in other operating expenses is a payment of Sh.10 million made on 30 September 2021. This is the annual
lease rental of computer and network equipment, being paid in arrears. The lease is for 5 years beginning this year,
although the company is treating the lease as an operating lease. The implicit interest rate is 10%. Any depreciation
expense is classified as an administration expense.
6. The company is yet to account for redundancy costs estimated at Sh.25 million. The management made a proposal
to the board in August to lay off staff beginning of October 2021. The board is yet to approve, and no announcement
has been made yet although the directors feel, the amount should be provided on prudence grounds.
7. After computing the cost of sales, the management was made aware about an error with the inventory module in the
accounting software, which understated the opening inventory by Sh.10 million and the closing inventory by Sh.15
million. The amounts are considered material based on the company's policies.
8. The par value of the loan stock will be settled on 30 September 2025. The effective interest rate is 10% and the
company has classified the loan stock at armotized cost.
9. The corporate tax rate for the year is estimated at Sh.35 million. The taxable temporary differences as at
30 September 2021 are given as follows:
Sh. “000”
For adjustment to Profit or Loss 47,000.00
For adjustment in revaluation reserve 3,000.00
50,000.00
The corporation tax rate is 30%.
Required:
Prepare the following financial statements for publication for the year ended 30 September 2021:
(a) The statement of profit or loss and other comprehensive incomes. (8 marks)
(b) The statement of changes in equity. (6 marks)
(c) The statement of financial position. (6 marks)
(Total: 20 marks)

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 QUESTION TWO
(a) Explain briefly, how an accounting firm should recognize revenue from providing various accounting services to
one client as per IFRS 15 ‘Revenue from Contract with customers’ (5 marks)
(b) Dr. Jacinta Mochari has been working as a resident dentist for the Afya Hospital for the past five years. On 1 January
2020, she began her private practice and leased a clinic in City Hospital Doctors’ Plaza. However, she was to
continue as a visiting dentist on request at Afya Hospital.

The following transactions took place during the year:

1. She opened a separate bank account for the practice and deposited Sh.5 million as capital. In addition, she obtained
a loan from the bank of Sh.5 million at interest rate of 12% annually. The loan will be paid over 5 years at Sh.1
million, together with interest due at the end of each year.
2. She imported three dental equipment, at a price of Sh.600, 000 each, though she incurred freight, insurance and port
clearance costs of Sh.200,000. The equipment is depreciated over five years.
3. She also bought other equipment for Sh.1 million, furniture and fixtures of Sh.2 million and dental books worth
Sh.500,000. Both the equipment and furniture were to be depreciated over 8 years, while the dental books have a
useful life of 5 years for the purpose of amortization.
4. Dr. Jacinta hired a dental aid, who also doubled as the clinic administrator at Sh.60,000 per month, a receptionist,
carrying out other clerical duties at Sh.30,000 per month and a cleaner/casual at Sh.15,000 per month. They all began
employment immediately.
5. Dr. Jacinta also hired the services of two other dentists to meet increased number of patients or when she was visiting
Afya. During the year, the dentists carried were paid for professional services at a cost of Sh.2 million. In addition,
Dr. Jacinta offered some interns learning opportunities and paid them total stipend of Sh.300,000.
6. During the year, patients paid Sh. 6 million in cash, while those on various insurance and medical covers were treated
at a total of Sh.4 million. By the end of the year, the corporates and insurance companies had paid Sh.2.8 million
directly into the business bank. Dr. Jacinta also noted that a client owing Sh.200,000 will likely not pay.
7. The cash that was received was banked but after paying the following items:

 Surgical and prescription medicine Sh.500,000

 Stationary Sh.40,000
 Cleaning consumables Sh.20,000
 Other office expenses such as telephone, internet and transport Sh.40,000

Cash drawings for personal use by Dr. Jacinta averaged Sh.40,000 per month. By the end of the year only Sh.120,000
was available in the office safe.
8. Majority of transactions took place in the bank, except for the one highlighted in note 7. Initially, Dr. Jacinta fixed
some amount and earned interest of Sh.120,000. Other expenses were mainly salaries to staff, interest on loan, rent
of Sh. 100,000 per month, electricity and water worth Sh.60,000. She also paid Sh.30,000 as subscriptions to the
dental association.
9. Dr. Jacinta had paid 3 months deposit on rent, which was refundable upon the termination of the lease. Dr. Jacinta
also drew Sh.60,000 every month for personal expenses from the bank. Meanwhile the electricity and water bills for
December had not been paid, but were subsequently received and settled in January 2021 at Sh.4,500.
10. Dr. Jacinta bought surgical and prescription medicine worth Sh.1.5 million on credit. By the end of the year, she had
already paid Sh.800,000 while surgical and medicine worth Sh.400,000 was available by end of the year.
Required:
Prepared for the year ended 31 December 2020

(i) The statement of profit or loss. (9 marks)

(ii) The statement of changes in capital (3 marks)

(iii) The statement of financial position. (8 marks)

(Total: 20 marks)

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 QUESTION THREE
The following statements of financial position relate to Hop Limited, Skip Limited and Amp Limited as at 30 September
2021.

Hop Ltd Skip Ltd Amp Ltd

Sh.000 Sh.000 Sh.000
Property, plant and equipment 271,000 215,500 104,940
Investments - Skip (Shares) 178,000
Skip (Loan Stock) 20,000
Amp 114,000
Others 25,000
608,000 215,500 104,940

Current assets
Inventories 48,500 29,100 72,720
Trade receivables 70,000 53,000 39,920
Cash 35,000 19,220 54,020
153,500 101,320 166,660
Total Assets 761,500 316,820 271,600

Equity
Share capital - Sh.100 par 300,000 150,000 200,000
Retained earnings 275,300 122,200 34,080
575,300 272,200 234,080

Noncurrent liabilities
10% Loan Stock 120,000 40,000 -
Current liabilities
Trade payables 66,200 4,620 37,520
Total Capital and Liabilities 761,500 316,820 271,600

Additional information:

1. Hop Limited acquired 80% of Skip Limited on 1 October 2019 at a cost of Sh.178 million and half of the Loan stock
in Skip Limited. At 1 October 2019, Skip Limited had a credit balance on its retained earnings of Sh.18 million. It is
the group’s policy to use full goodwill, which can be fairly estimated using the proportions of the parent and the non-
controlling interest.

2. During the year ended 30 September 2021 Skip Limited sold goods to Hop Limited for Sh.24 million. On 30
September 2021 half of these goods remained unsold. Skip Limited sells goods at a markup of 25%.

3. On 30th April 2020, Hop Co Limited acquired 25% of Amp Limited at a cost of Sh.114 million. Amp Limited had a
retained earnings credit balance of Sh.32 million at this time.

4. The fair values of Skip Limited and Amp Limited were not materially different from their book values at the
time of acquisition, with the following exceptions:

(i) Skip Limited held inventories with a fair value which was Sh.4 million greater than book value. All of
these inventories had been sold by 30 September.
(ii) Items of plant and equipment belonging to Skip Limited had a fair value of Sh.10 million in excess of
book value. By 30 September 2021, the items of plant had 50% depreciation applied.

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 5. An impairment test conducted as at 30 September 2021 indicated that half of the recognized goodwill relating to the
investment in Skip Limited was impaired, which only applies at group level. No impairment loss is reported on the
investment in Amp Limited.

6. Both Skip Limited and Amp Limited are listed companies. In preparing its statement of financial position, Hop
Limited is yet to reflect the following accounting treatments as required by IAS 27 for separate financial statements:

Investment Fair Value Basis

Sh.“000”
Investments - Skip Limited 170,000 At Fair Value through other comprehensive incomes under
(Shares) IFRS 9
Skip Limited (Loan 20,000 At amortized cost
Stock)*
Amp Limited 124,000 At Fair Value through other comprehensive incomes
Others 27,000 At Fair value through Profit or Loss

*This is at amortized cost.

Required
Prepare the consolidated and separate (Parent) statement of financial position as at 30th September 2021 (20 Marks).

QUESTION FOUR

ElimuMingi University is a public university based in the coastal parts of the country. The University has summarized the
following information for the purpose of preparing the budget information according to IPSAS 24 for the financial year ended
30 June 2021.

Original Budget Adjustments Final budget Actual

Revenue Sh.“million” Sh.“million” Sh.“million” Sh.“million”
Government Grants and Subsidies 856.00 (24.00) 832.00 810.00
Internally generated 1,230.00 140.00 1,370.00 1,220.00
Expenditure
Personnel Costs 1,480.00 (110.00) 1,370.00 1,520.00
Management and Council expenses 55.00 (5.00) 50.00 56.00
Administration Expenses 395.00 (8.00) 387.00 420.00
Students Welfare 19.00 8.00 27.00 25.00
Repair and Maintenance costs 86.00 (6.00) 80.00 102.00
Audit Fees 2.00 0.00 2.00 2.00

Required:
(a) Prepare the statement of comparison of budget and actual information as per IAS 24. (10 marks)

(b) Provide a rationale explanation where the difference between the actual and final budget exceeds the 10% threshold
as per IAS 24. (8 marks)

(c) The University is considering various sources of revenue, being a public entity, in order to improve its financial
performance. IPSAS 23 provides potential revenues for public sector entities, more specifically those arising from
nonexchange transactions.

Briefly explain the meaning of revenue from nonexchange transactions, providing two possible sources of revenue
from nonexchange transactions that the university can use. (2 marks)
(Total: 20 marks)

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 QUESTION FIVE
The management board of Zico Limited is reviewing the performance of the company for the year ended 30 June 2021 relative
to 30 June 2020. The company is engaged in buying and selling various agricultural products and despite challenges in the
operating environment due to Covid, the results for 2021 are better than those of 2020.
The company has presented the following financial statements for the two years:
Zico Limited
Statement of profit or loss for the years ended 30 June:

2020 2021
Sh.“000” Sh.“000”
Revenue 2,027,310 4,306,533
Cost of sales (1,503,999) (3,289,702)
Gross profit 523,311 1,016,831
Administrative expenses (225,600) (328,250)
Distribution Costs (167,630) (267,800)
Profit Before Interest 130,081 420,781
Finance Costs (44,600) (108,399)
Profit before tax 85,481 312,382
Income tax expense (26,400) (52,500)
Profit for the period 59,081 259,882
Dividends Paid (30,500) (65,300)
Retained Profit for the year 28,581 194,582
Retained Profit b/f 329,769 358,350
Retained Profit c/f 358,350 552,932

Statement of Financial Position as at 30 June:

2020 2021
Non-current assets Sh.“000” Sh.“000”
Property, plant and equipment 259,610 571,570

Current assets
Inventories 382,078 654,980
Trade and other receivables 647,356 1,802,286
Bank and Cash 68,600 81,000
1,098,034 2,538,266
Total Assets 1,357,644 3,109,836

Capital
Share capital 80,000 80,000
Retained earnings 358,350 552,932
438,350 632,932
Non-current liabilities 104,972 998,050
Current liabilities 814,322 1,478,854
Total Liabilities 919,294 2,476,904
Total Capital and Liabilities 1,357,644 3,109,836

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 Required:
(a) Prepare the following common size reports:
(i) Vertical analysis for years 2020 and 2021 using revenue as the common base for profit or loss and total
asset as the common base for the statement of financial statements (4 marks)

(ii) Horizontal analysis, using year 2020 as the common base for analyzing year 2021 (2 marks)

(b) Compute the following ratios for each of the two years:
(i) Net Profit Margin. (1 mark)

(ii) Return on equity. (1 mark)

(iii) Current ratio. (1 mark)

(iv) Quick ratio. (1 mark)

(v) Debt ratio. (1 mark)

(vi) Debt equity ratio. (1 mark)

(vii) Inventory turnover ratio. (1 mark)

(viii) Total assets turnover ratio. (1 mark)

(c) Using the financial statements and the various ratios, comment on the performance of year 2021 compared to year
2020, with respect to profitability, liquidity and solvency. (6 marks)
(Total: 20 marks)
……………………………………………………………………

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