REVISION QUESTIONS

Question 1 [IAS 23 Borrowing Costs – May 2018]

On 1 January 2017, Chaminuka Limited borrowed $12 million for a term of one year, exclusively
to finance the construction of a production equipment. The interest rate on the machine is 10%
and is payable on maturity of the loan. The construction commenced on 1 February 2017 but
ceased on 1 March 2017 to 30 April 2017 due to an industrial action taken by workers in protest
of poor working conditions. The asset was available for use on 31 December 2017 having a
construction cost of $12 million.
REQUIRED:
What is the carrying amount of the production equipment in Chaminuka Limited’s Statement of
Financial Position as at 31 December 2017, taking into account the requirements of IAS 23?

Question 2 [IAS 23 Borrowing Costs]

IAS23 - Borrowing Costs sets out the conditions that must be met in order to capitalise
borrowing costs incurred by entities purchasing or constructing non-current assets.

(i) Henry Plc commenced construction of a non-current asset on 1 June 2017. On 1 July
2017, it borrowed $5 million at an annual interest rate of 8% to finance the
development. On 15 November 2017, the workers went on strike and no work was done
until the dispute was settled on 15 December 2017. The project was still in progress at
31 March 2018. Interest was paid monthly in arrears.

(ii) Georgina Plc drew down a loan of $2 million on 1 April 2017 to part-finance the
construction of a new building. The rate of interest applicable was 6% per annum.
Building commenced on 1 April 2017, but no money was spent until 30 June 2017 when
the construction company were paid their first instalment of $1.2m. The $2m borrowed
was invested for 3 months (April – June) in government bonds carrying an annual
interest rate of 2%. Once the construction company was paid, the remaining $0.8m was
placed with a bank on deposit at a rate of 3% per annum. This was withdrawn on 30
September 2017 and spent on the development. The asset was completed on30
November 2017.

REQUIREMENT:
(a) Discuss the conditions that must be met in order to capitalise borrowing costs under IAS 23
- Borrowing Costs.

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Your answer should set out when the capitalisation of borrowing costs should commence, be
suspended, and cease. (8 marks)
(b) In the case of (i) and (ii) above, recommend the accounting treatment as required by IAS 23.
Show any journal entries necessary to record the transactions. (12 marks)
[Total: 20 Marks]

Question 3 [IAS 20 Accounting for Gvt grants and disclosure of Gvt assistance - May 2015]
A company receives a 20% grant towards the cost of a new item of machinery, which cost $100
000. The machinery has an expected useful life of four years and a nil residual value. The
expected profits of the company, before accounting for depreciation on the new machine or
the grant, amount to $50 000 per annum in each year of the machinery’s life.

REQUIRED:
Account for the government grant using both the reduction of cost and deferred income
approach in the Statements of Comprehensive Income and the Statement of Financial Position.

Question 4 [IAS 20 Accounting for Gvt grants and disclosure of Gvt assistance - May 2018]
On 1 January 2016 Chigu Limited received $60 000 government grant relating to equipment
which cost $180 000 and had a useful life of six years. The grant was netted off against the cost
of the equipment. On 1 January 2017, when the equipment had a carrying amount of $100 000,
its use was changed so that it was no longer being used in accordance with the grant. This
meant that the grant needed to be repaid in full but by 31 December 2017 but this had not
been done.
REQUIRED:
What is the correct accounting treatment of the government grant and the equipment in the
financial statements of Chigu Limited for the year ended 31 December 2017?

Question 5 [IAS 40 Investment Property & IAS 16 PPE)

In the case below, outline briefly the appropriate accounting treatment and show the journal
entries in the financial statements of Williamson plc (Williamson) for year ended 31 March
2015, resulting from recording the events described. Any entry affecting the performance
statement must be clearly classified as either ‘profit or loss’ or ‘other comprehensive income’.
Williamson adopts the revaluation model of IAS 16 Property, Plant & Equipment and the fair
value model of IAS 40 Investment Property.

Williamson owns a piece of property it purchased on 1 April 2012 for $3.5 million. The land
component of the property was estimated to be $1 million at the date of purchase. The useful
economic life of the building on this land was estimated to be 25 years on 1 April 2012. The

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property was used as the corporate headquarters for two years from that date. On 1 April 2014,
the company moved its headquarters to another building and leased the entire property for
five years to an unrelated tenant on an arms-length basis in order to benefit from the rental
income and future capital appreciation. The fair value of the property on 1 April 2014 was $4.1
million (land component $1.9 million), and on 31 March 2015, $4.8 million (land component
$2.1 million). The estimate of useful economic life remained unchanged throughout the period.
Land and buildings are considered to be two separate assets by the directors of Williamson.

Question 6 [IAS 38 Intangible Assets – May 2016)

Ostrich (Pvt.) Ltd is a company trading in decorated ostrich eggs and has a December year end.
Owing to an extensive overseas market in African Ostrich (Pvt.) Ltd decided to export its
products.

In order for Ostrich (Pvt.) Ltd to enter the export market, the development of a website for its
own use was necessitated. Potential export customers can visit the website to place orders and
complete transactions in a secure web environment.

During May and June 2015, the management of Ostrich (Pvt.) Ltd investigated and planned the
development of their own website. Costs incurred during this period were as follows:

$
Travelling expense 8 000
Consultation fees 27 000
Viability studies concluded that the website would lead to a substantial improvement in
profitability.

During July to November 2015, a firm of web consultants was employed to complete the
website, and the following costs were incurred:
$
Content development costs and programming 130 000
Graphic design costs 35 000

The website was successfully completed and implemented on 31 December 2015. Assume that
all the requirements of IAS 38.57 have been met for the capitalization of website costs.
Although the future economic benefits of the website could not be accurately measured, it was
estimated they would flow to the entity for a period of four years due to the rapid change in
technology.
REQUIRED:

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(i) Advise the management of Ostrich (Pvt.) Ltd on the accounting treatment of the
expenditure incurred concerning the website. Your answer must be sustained by
referring to the requirements of statements of GAAP.
(ii) How will your answer in part a. change if the website is developed solely to promote
and advertise the entity's products?

Question 7
IAS 38 - Intangible Assets sets out the principles of accounting for the recognition and
measurement of intangible assets. The standard differentiates between intangible assets
acquired individually, those acquired as part of a business combination, and those which are
internally generated.

Charlie Plc (Charlie) has entered into the following transactions during the financial year ended
31 July 2019:

(i) On 1 August 2018 Charlie acquired the exclusive Irish distribution rights for a unique
home entertainment digital set-top box. The cost of the rights to Charlie was $2.1
million, and the term of the deal was 3 years.
(ii) On 1 August 2018 Charlie commenced work on promoting the brand and developing
sales of the product referred to in (i) above. This effort was hugely successful, and the
“Charlie” brand became massively popular and well known. Charlie wishes to include
the brand in its financial statements for year ended 31 July 2019 at its estimated fair
value of $12 million.
(iii) Charlie wishes to replicate its Irish success in other countries by selling the product into
other markets. The company has spent $500,000 during the year researching the UK
market and wishes to capitalise this expenditure as an intangible asset.

REQUIREMENT:
(a) Discuss the requirements of IAS 38 with respect to the initial recognition and measurement
of intangible assets acquired (1) separately for cash, (2) as part of a business combination,
and (3) internally generated. (9 marks)
(b) In each of the scenarios (i) to (iii) above, outline the appropriate accounting treatment for
the year ended 31 July 2019. Parts (i) and (ii) carry 4 marks each, and part (iii) carries 3
marks. (11 marks)
[Total: 20 Marks]
Question 8 (IAS 38 Intangible Assets)
X Ltd purchased a transferable hunting quota from the Parks and Wildlife Authority on 1
January 2015. The following information on the quota is available:

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Cost price of quota (purchased 1 January 2015) $3 500 000
Accumulated amortisation on 31 December 2018 $2 100 000
Total useful life (straight-line) 5 years
Financial year-end 31 December

On 1 January 2019, the quota had a fair value of $4 200 000.

Required
Journalise the revaluation of the asset including amortisation for subsequent years according to
the two allowed alternatives in accordance with IAS 38.

Question 9 [IAS 37 Provision, Contingent Liabilities & Contingent Assets - November 2014 &
2015]
The following provisions have been included in the financial statements of Gwaringa Limited as
at 31 December 2013:
$
i. Provision for repair costs for sales under warranty 250,000
ii. Provision for repairs and maintenance of plant and machinery 75,000
iii. Provision for expected operating losses to be incurred
in a trade show schedule for March 2014 35,000
iv. Provision for the dismantling and selling of non-
current assets classified as held for sale 15,000
v. Provision for severance pay to employees in a discontinued
operation 50,000
vi. Provision for relocation and retraining staff affected by
restructuring programme 60,000

REQUIRED:
Discuss with brief reasons in each of the above cases, whether provisions must be recognised at
31 December 2013 so as to comply with the requirements of the GAAP, Assume that all
amounts are material. [20 marks]

Question 10 [IAS 12 Income Taxes - November 2016]

(a) The Income Statement of Xolani Ltd for the most recent year was as follows:
$000
Operating profit 3 063.7
Less: Operating expenses
Depreciation on non-current assets (437)
Entertainment expense (104.5)

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Interest expenses (72.2)
Profit for the year 2 450.0

The entertainment expense above was of a private nature. ZIMRA granted the company capital
allowances of $617 500 on non-current assets. The actual amount of interest paid by the
company was $55 100.
Required:
Calculate the taxable income and tax payable if the tax rate is 25% (excluding Aids Levy).
Calculate the current year tax charge to profit or loss if tax due on previous period was agreed
in this current year with the tax authorities to be $40 000 when at first it had been estimated to
be $33 000 in that previous year. (10 marks)

(b) A manufacturing company bought new equipment on 1 January 2012 for $4 600 000. The
equipment had an expected useful life of 5 years and is being depreciated on the straight-
line basis with no residual value.

On 31 December 2015 the company sold the equipment for $1 200 000. The profit before
tax for 2014 was $ 1 104 000-00 and for 2015 it was $ 1 380 000-00. The tax rate was 35%
throughout the period 2012 to 2015. The company’s financial year end is 31 December. The
company’s financial year end is 31 December.

For tax purposes ZIMRA allowed wear and tear on the following basis:

50% in the first year.

30% in the second year.
20% in the third year.
Required:
(i) Calculate the temporary differences and deferred tax assets/liabilities for the years 2012
to 2015. (4 marks)
(ii) Calculate the taxable profit and current tax expense for 2014 and 2015. (3 marks)
(iii) Disclose the relevant information on the face of the extract financial statements for the
year ended 31 December 2015 so as to comply with the requirements of IAS12.
(3 marks)
[Total: 20 marks]

Question 11 [IAS 8 and IAS 12 – August 2018]

Records of the property, plant and equipment of Revai Ltd showed the following at 1 July 2016:

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 $
Machinery at cost 600 000
Accumulated depreciation (292 800)
307 200

In the past, the company accounted for depreciation at 20% per annum using the reducing
balance method. However, at a meeting of the board of directors in 2017, it was decided that
from the beginning of the year ending 30 June 2017 machinery would be depreciated on the
straight line method as it better reflects the economic benefits from the machinery. The total
useful life of the machinery had originally been estimated as 7 years. (It may be assumed that
this estimate is still correct.) No depreciation charge has been accounted for in the current
year.
The Zimbabwe Revenue Authority allows a wear and tear allowance of 20% using the reducing
balance method. Tax rates for the past 5 years have remained unchanged at 28%. The company
will earn sufficient taxable income in future to justify the provision of a debit balance on the
deferred tax account, should it be necessary.
REQUIRED:
a) Calculate the following for inclusion in the financial statements of Revai Ltd for the year
ended 30 June:
i) Depreciation for the current year (2017). (2 marks)
ii) Depreciation for 2018 and 2019. (3 marks)
b) Discuss the disclosure requirements relating to the above change in accounting estimate so
as to comply with the requirements of International Financial Reporting Standards. (3
marks)
(c) Prepare a table showing temporary differences and deferred tax on this asset. (12 marks)
[Total: 20 marks]

Question 12 [IAS 12 Income Taxes - May 2018]

The accountant of Nunki Ltd prepared separate accounting profit and taxable income
calculations for the year ended 31 December 2017.

Notes Accounting profit Taxable income

$000 $000
Gross profit 600 600
Other expenses -200 -200
Other income 100 100
Dividend received 40
Donations -20

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Office building 1
Depreciation of office building -10
Manufacturing plant 2
Depreciation of manufacturing plant -60
Wear and Tear allowance on manufacturing plant -85
Gain on sale of land 80
Rental received for the year 120 120
Rental received in advance 10
Value added tax penalty -5
Operating lease:
Instalment paid -90
Equalized instalment -55
Finance lease: 3
Instalment paid -35
Depreciation -25
Interest paid -15
550 420

Additional Information
1. The cost of the original office building was $200 000 and the building is depreciated at 5%
per annum on the straight-line method. On 31 December 2017, the carrying amount is
$150,000.
2. Information on the manufacturing plant is as follows:
Carrying amount at 31 December 2017 is $140 000.
Tax base at 31 December 2017 is $115 000.
3. The finance lease relates to the acquisition of plant with a cost price of $100 000. The term
of the finance lease is 4 years and interest is charged at 15% p.a. The asset held under the
lease contract, entered into on 1 January 2017 is depreciated on the straight-line basis over
the four years.
4. Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year end and that there were no changes.
5. Assume a tax rate of 28%. Ignore capital gains tax.
6. There was no balance on the deferred tax liability account at 31 December 2016.

REQUIRED:
a) Prepare reconciliation between accounting profit and taxable income by differentiating
between temporary differences, non-taxable items and non-deductible items for tax
purposes. (8 marks)
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b) Calculate the income tax expense for the year ended 31 December 2017. (3 marks)
c) Prepare the tax reconciliation for the year ended 31 December 2017. (3 marks)
d) Assume that on 1 February 2018 the Minister of Finance in the Budget Statement
announces a change in the corporate tax from 29% to 28%. The change is effective for
entities with a year of assessment ending on or after 1 March 2019. No other significant
changes in the tax laws are announced in the Budget Statement. Assume that the financial
statements for 2017 are approved for issue on 15 February 2018.
Required:
Discuss, with reasons, what the effect of the reduction in the tax rate has on the financial
statements for the year ended 31 December 2017. (6 marks)
[Total: 20 marks]
NB. Your solution must comply with the requirements of Statements of Generally Accepted
Accounting Practice.

Question 13 [IAS 33 Earnings Per Share]

IAS 33 - Earnings per Share sets out the requirements for calculating and disclosing the basic
earnings per share figure for quoted entities.

The following figures appeared in the Consolidated Statement of Profit or Loss and Other
Comprehensive Income of Jakarta Plc for year ended 31 July 2016, together with comparatives
for 2015:
$million $million
2016 2015
Profit before taxation 400 300
Taxation on profit (75) (60)
Profit for the period 325 240
Other comprehensive income – revaluation gains on land 30 10
Total comprehensive income for the period 355 250
Profit for the year attributable to:
Owners of the parent 280 210
Non-controlling interests 45 30
Profit for the year 325 240
Total comprehensive income for the year attributable to:
Owners of the parent 310 220
Non-controlling interests 45 30
Total comprehensive income for the year 355 250

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The following figures are taken from Jakarta’s Statement of Financial Position as 31 July 2016,
together with comparatives:

$million $million
2016 2015
Equity share capital of $0.50 each 460 200
4% Preference shares – non-redeemable, non-cumulative 100 100
Share premium 215 60
Retained earnings 688 570
Other equity reserves 90 60
Non-controlling interests 85 40
Total equity 1,638 1,030

During the year ended 31 July 2016 the following changes took place to the issued share capital
of Jakarta Plc:

(i) 100 million equity shares were issued in conjunction with the acquisition of another
business. These were issued at full market price at the date of issue, 1 November 2015.
(ii) 150 million ordinary shares were issued for cash to existing shareholders on 1 February
2016. The issue price was $1.50 per share, which represented a discount of 25% on the
traded price immediately before the issue of ($2.00).
(iii) On 31 July 2016, a bonus issue of 270 million shares was completed, capitalising $135
million of retained earnings. Also on this date the preference dividend due for the year,
and an equity dividend of $23 million, were paid.
REQUIREMENT:
(a) Discuss the significance of the earnings per share (EPS) figure to the analysis of company
performance. Why is it important to have an accounting standard in this area? (6 marks)
(b) Applying the requirements of IAS 33 - Earnings Per Share to the information above,
calculate the basic EPS for year ended 31 July 2016 and the comparative figure for 2015 to
be reported in the 2016 financial statements. The EPS figure originally reported in 2015 was
$0.525. (14 marks)
[Total: 20 MARKS]

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