CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF ENTREPRENEURSHIP AND BUSINESS SCIENCES

DEPARTMENT OF ACCOUNTING SCIENCES AND FINANCE

BSc (HONS) IN ACCOUNTANCY

MARCH - JUNE 2022

LEVEL 2.2

FINANCIAL REPORTING TUTORIAL QUESTIONS

1
QUESTION 1
a) You are employed by Rwembuya Ltd (Rwembuya). Rwembuya provides
accounting and tax consulting services to various clients. The International
Accounting Standards Board (IASB) issued the revised Conceptual Framework for
Financial Reporting (Conceptual Framework), a comprehensive set of concepts
for financial reporting in March 2018. Your portfolio includes the following two
allocated clients who have approached you regarding the recognition of assets
and liabilities in terms of the revised Conceptual Framework.

Client 1: Chembudzi Ltd

On 13 June 2019, Chembudzi Ltd (Chembudzi) purchased a holographic touch
screen patent from Technology Ltd (Technology) at a cost of $250 million. This
patent will give Chembudzi access to all the patents internationally and locally for
the design and manufacture of holographic touch screens. Only Chembudzi can
utilise the patent to design and manufacture the holographic touch screens. This
will result in Chembudzi selling the first holographic touch screen smartphones and
it will ensure that Chembudzi is the only designer and manufacturer of such
smartphones.
Chembudzi will manufacture all the other components of the smartphones and it
will assemble the holographic touch screen smartphones and it is estimated that 90
million holographic touch screen smartphones will sell within the next financial
year at a satisfactory profit margin.

Client 2: Pedyonemvura Ltd

Pedyonemvura Ltd (Pedyonemvura) is a new real estate agency that specialise in
selling beach front holiday homes for the upper middle class market.
Pedyonemvura is operating in the Zambezi Valley Coast region of Zimbabwe. As
part of its expansion strategy, a decision has been taken by the directors of the
company to open a new office in the North Coast of Zambezi Valley region.
Pedyonemvura paid $40 000 to Achimwene News to advertise holiday homes for
sale in the newspaper to appear during January 2021. This amount was paid on 15
December 2021.

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Required:
Discuss, in terms of The Conceptual Framework for Financial Reporting 2018,
whether the patent (refer to client 1) and payment to Achimwene News (refer to
client 2) may be recognised as an asset in the financial statements of Chembudzi
Ltd and Pedyonemvura Ltd for the year ended 31 December 2021. Ignore any
normal income tax implications and Value Added Tax (VAT) implications.
(15 Marks)

b) The International Accounting Standards Board has issued the Conceptual

Framework for Financial Reporting which, amongst other things, sets out the
purpose of the Conceptual Framework and the “fundamental and enhancing
qualitative characteristics of useful financial accounting information” for
external users.
Required:
Explain three purposes of the Conceptual Framework for Financial Reporting and
explain the two fundamental and enhancing qualitative characteristics. (10 marks)
[TOTAL: 25 MARKS]

QUESTION 2
a) Wamambo Gaming Ltd (Wamambo) is an electronics and software company
which develops and manufactures gaming devices, consoles and games software
and sells its products online directly to consumers.
During the year ended 30 November 2021 Wamambo launched a new games
console and sold 50 000 units. To encourage sales, each games console came with
a 12-month warranty covering technical faults. Each console retails at $600 which
includes a 50% mark-up.
Research on prototype models of the new console indicated that 10% of consoles
are expected to break down over the next year. Of these, 10% are expected to
result in total failure of the console with the remainder split equally between
minor faults with the power supply module and major faults with the software.
Minor faults are expected to cost $50 to repair and major faults are expected to

3
cost $200. In the case of total failure, Wamambo offers customers the choice
between a new console or a full refund.
A member of the research and development department has expressed concerns
about console breakdowns while being charged, claiming that this could represent
a serious fire risk. He has cited anecdotal evidence surrounding certain models of
mobile phone which have caught fire during charging and has suggested that there
is a 1 in 20 risk of a console catching fire which could result in a lawsuit giving rise
to settlements of up to $100 000. He is currently undertaking tests on the consoles
and is expected to present the findings of his research in six months’ time.
Required:
i) Explain, with reference to the requirements of IAS 37 ‘Provisions, Contingent
Liabilities and Contingent Assets’, what is meant by a provision and how it
should be recognised in Wamambo’s financial statements in respect of the new
games console. (8 Marks)
ii) Calculate the provision for the year ending 30 November 2021 in respect of the
breakdown warranty. You should justify any approach taken with a supporting
commentary where applicable. Explain how this provision will be reported in
Wamambo’s 2021 financial statements. (6 Marks)
iii) Advise the directors of Wamambo on how to determine an appropriate
provision in respect of the fire risk. Your answer should include reference to any
possible approach that could be taken in respect of a contingent liability. (5
Marks)

b) Chigiredha Ltd purchased an energy saving plant for $100 000. On 1 January
2021, having a useful life of 5 years with a residual value of $10 000. The entity
received a government grant equal to 20% of the cost of the asset, on the
condition that the plant must be used at least for a period of 4 years, otherwise
a repayment will arise on a sliding scale basis, that is, 75% of the grant will be
payable if the asset is sold in the first year and it will diminish by 25% for
subsequent years upto the fourth year. Chigiredha Ltd has no intention to sell
the plant in the first year.
Required:

4
Show how the plant and the related government grant will be accounted for in the
financial statements of Chigiredha Ltd for the year ended 31 December 2021 using
the gross up method and the net method, separately. (6 Marks)
[TOTAL: 25 MARKS]
QUESTION 3
a) Chenjeresai Ltd (Chenjeresai) is a company that owns two self-storage unit
complexes in Harare. These units are rented to individuals or companies as
secure storage spaces to be used as needed. Chenjeresai has a 31 December
year end.
Chenjeresai’s storage complexes are unique in that the units are made up of
individual shipping containers that are stacked in a specific manner. Chenjeresai
obtains its shipping containers from Johannesburg where the market for containers
is highly liquid due to the large number of containers stored there. During 2021 the
average price for a container similar to the size and condition used by Chenjeresai
in Johannesburg was $28 000. There is a small market for containers in Harare. The
average price of a container in Harare was $29 000 during 2021. Chenjeresai
purchased 10 new containers on 29 December 2021 from an insolvent estate at $24
000 each.
The financial director decided to use a discounted cash flow method to determine
the fair value of the containers. The financial director determined that the fair
value of the containers was $30 750 each.
During the year Chenjeresai became aware of a new alternative use for shipping
containers. The metal used for the containers has excellent anti-corrosion qualities
and is thus in demand in coastal areas for roof sheeting and other construction
elements. Chenjeresai was offered $29 500 by three different steel merchants for
disassembled containers in December 2021. The costs to disassemble each
container are negligible. The managing director indicated that Chenjeresai is a
family business and is not interested in selling the containers to the steel
merchants.
Required:
Discuss, with reasons, the appropriate fair value in terms of IFRS 13 the fair value
of each container for the year ended 31 December 2021. (13 Marks)

5
b) Draft financial statements of Zamazama Limited (ZZL) for the year ended 31
December 2021 show the following amounts:
$million
Total assets 2 700
Total liabilities 1 620
Net profit for the year 398
While reviewing the draft financial statements, it was noted that ZZL commenced
development of a new product on 1 January 2021. Following directly attributable
costs have been incurred upto the launching date of 1 October 2021 and have been
capitalized as intangible asset:
$million
Staff salary 30
Equipment (having useful life of 5 years) 360
Consumables 90
Consultant fee 212
Total 692
The recognition criteria for capitalization of internally generated intangible assets
were met on 1 March 2021. All costs have been incurred evenly during the period
except equipment which was purchased specifically for this product on 1 January
2021. ZZL estimated that useful life of this new product will be 10 years. However,
ZZL had not charged any amortization in 2021.
Required:
Determine the revised amounts of total assets, total liabilities and net profit, after
incorporating the impact of the adjustment(s), if any. (12 Marks)
[TOTAL: 25 MARKS]
QUESTION 4
The following trial balance has been extracted from the ledgers of Hondoiyo
Limited at 31 March 2021.
Note $000 $000
Revenue 1 8 700
Purchases 1 500
Production costs 1 200
Administrative expenses 980
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Distribution costs 370
Bank interest paid 50
Research and development 2 470
Land and buildings at valuation – 1 April 2020 4,5 1 700
Equipment at cost 6 4 500
Investment property at valuation – 1 April 2020 7 2 200
Accumulated depreciation:
-Buildings 4 400
-Equipment 6 450
Intangibles at cost 3 500
Accumulated amortisation of intangibles at 1 April 2020 3 50
Inventory at 1 April 2020 50
Bank 400
Trade receivables 11 350
Loan 9 1 000
Interim dividend paid 350
Trade payables 400
Corporation tax 10 35
Ordinary share capital 1 250
Share premium 250
Revaluation reserve at 1 April 2020 300
Retained earnings at 1 April 2020 1 785

The following additional information is provided to assist you in preparing the

financial statements:
1. Included within revenue is a government grant of $150 000 that Hondoiyo
Limited received. The grant relates to the employment of additional staff that
will occur during the next financial year.
2. Research and development expenditure comprises the following:
 $80 000 on general research
 $67 000 on developing new technology. At the year end the directors do not
think the development will be successful.

7
  $323 000 on development of new production technology. The development
is almost complete and they are highly confident that the technology will
result in significant cost savings.
3. Intangibles at cost relates to a development that was being amortised over a
useful life of 10 years. At 1 April 2020 this was reviewed and the development
was then assessed as having a remaining useful life of 6 years.
4. The $ 1 700 000 is based on last years revaluation and includes land at a
valuation of $1 000 000. Land has an indefinite useful life. The buildings should
be depreciated on the value at the start of the year and the remaining useful
life was 20 years at 1 April 2020.
5. At the year end the directors obtained the following valuations:
 Land $1 250 000
 Buildings $570 000
6. Equipment is depreciated on a straight line basis over 5 years. Hondoiyo
Limited estimate that the equipment is used in the business on the following
basis:
 50% in production
 25% in the administration
 25% in distribution
7. The year end valuation of the investment property was $2 500 000 and
Hondoiyo Limited’s accounting policy is to use the fair value model for
investment properties.
8. The year end inventory was valued a $65 000, but it was subsequently
discovered that goods included within this with a cost of $7 000 were sold for
$2 000.
9. Hondoiyo Limited took out the loan of $1 000 000 on 1 April 2020 and is
repayable in four equal annual instalments. The interest rate on the loan is
10%, payable six monthly and Hondoiyo Limited owes six months’ interest at
year end.
10.The corporation tax for the previous year was settled in December 2018 and the
estimate for corporation tax for the year ended 31 March 2021 is $625 000.

8
11.The directors have also discovered that a customer, who owed $125 000 at the
year end was declared bankrupt in April 2021.
Required:
a) Prepare the financial statements of Hondoiyo Limited in as far as the
information given permits. (22 Marks)
b) Explain the accounting treatment for the revenue referred in Note 1.
(3 Marks)
[TOTAL: 25 MARKS]
QUESTION 5
a) In producing the Conceptual Framework for Financial Reporting (the
Framework) and some of the current International Financial Reporting
Standards (IFRSs), the International Accounting Standard Board (IASB) has to
address the potential problem that the management of some companies may
choose to adopt inappropriate accounting policies. These would have the effect
of portraying a reporting entity’s financial performance and position in a
favourable manner. In some countries this is referred to as ‘creative
accounting’. Included in the Framework, and a common feature of many recent
IFRSs, is the application of the principle of ‘substance over form’.
Required:
i. Describe in broad terms common ways in which management can manipulate
financial statements to indulge in creative accounting and give reasons why
they would do so. (9 Marks)
ii. Explain the principle of substance over form and how it limits the practice of
creative accounting, and for each of the following areas of accounting describe
an example of the application of substance over form:
 Group accounting (3 Marks)
 Measurement and disclosure of current assets (3 Marks)
b) Discuss the view that historical financial statements are outdated by the time
they are produced and therefore should not be used for decision making
purposes. (10 Marks)
[TOTAL: 25 MARKS]

9
QUESTION 6
a) Mambodza Limited purchased some plant in June 2021 costing $1 600 000. Its
useful life is expected to be ten years and the residual value at the end of its
useful will be $100 000. It received a grant of 30% of the cost of the asset in
August 2021 having received government approval before it purchased the
plant. Any grant received becomes repayable if the asset is sold within five
years. Its company policies are to depreciate in full in the year of purchase and
none in the year of sale and to maximise asset values.
Required:
Prepare the relevant extracts for the financial statements for the year ended
31 December 2021. (10 Marks)
c) The following scenarios obtain:
CASE 1: A clothing retailer has a policy of taking back items of clothing that
customers have purchased, and refunding the purchase price, simply because
the purchaser has changed their mind about the item. The retailer does not
have a legal obligation to do this under the consumer protection legislation that
applies in the jurisdiction in which it operates.
CASE 2: A company is planning a reorganisation. These plans are in the early
stage.
CASE 3: Fen Properties owns a series of high rise modern office blocks in
several major towns in Zimbabwe. The government introduces legislation that
requires toughened safety glass to be fitted in all windows on floors above the
ground. The legislation only applies initially to new buildings but all buildings
will have to comply within 5 years.
CASE 4: Jan Energy Ltd operates in a country where there is no environmental
legislation. Its operations cause pollution in this country. Jan Energy Ltd has a
widely published policy in which it undertakes to clean up all contamination
that it causes and has a record of honouring this published policy.
CASE 5: Shekiman Ltd gives warranties at the time of sale to purchasers of its
products. Under the terms of the sale contract the company undertakes to
make good any manufacturing defects that become apparent within 3 years
from the date of sale. In the period it has sold 250 000 appliances and estimate
that about 2% will prove faulty.
10
 CASE 6: on 13 December Kambu Engineering Ltd decided to close a factory. The
closure will lead to 100 redundancies at a significant cost to the company. At
31 December no news of this plan had been communicated to the workforce.
Required:
Identify and justify in each case whether there is an obligating event or not.
(15 Marks)
[TOTAL: 25 MARKS]
QUESTION 7
a) Gurundoro Ltd is preparing its financial statements for the year ended 30
September 2021. The following matters are all outstanding at the year end.
CASE 1. Gurundoro Ltd is facing litigation for damages from a customer for
the supply of faulty goods on 1 September 2021. The claim, which is for $500
000, was received on 15 October 2021. Gerigina Ltd’s legal advisors consider
that Gerigina Ltd is liable and that it is likely that this claim will succeed. On
25 October 2021, Gurundoro Ltd sent a counter-claim to its suppliers for $400
000. Gurundoro Ltd’s legal advisors are unsure whether or not this claim will
succeed.
CASE 2. Gurundoro Ltd’s sales director, who was dismissed on 15 September,
has lodged a claim for $100 000 for unfair dismissal. Gurundoro Ltd’s legal
advisors believe that there is no case to answer and therefore think it is
unlikely that this claim will succeed.
CASE 3. Although Gurundoro Ltd has no legal obligation to do so, it has
habitually operated a policy of allowing customers to return goods within 28
days, even where these goods are not faulty. Gurundoro Ltd estimates that
such returns usually amount to 1% of sales. Sales in September 2021 were $400
000. By the end of October 2021, prior to the drafting of the financial
statements, goods sold in September for $3 500 had been returned.
CASE 4. On 15 September 2021 Gurundoro Ltd announced in the press that it
is going to close one of its divisions in January 2022. A detailed closure plan is
in place and the costs of closure are reliably estimated at $300 000, including
$50 000 for staff relocation.
CASE 5. Gurundoro Ltd is jointly and severally liable with Kudenga Ltd and
Tunga Ltd for a legally binding obligation of repairing damaged electrical
11
 gadgets worth $120 000. The extent of the liability amongst Gurundoro,
Kudenga and Tunga is 40%, 35% and 25% respectively.
Required:
Show, with reasons, how the transactions should be treated in Gurundoro Ltd’s
financial statements for the year ended 30 September 2021. (16 Marks)
b)Two of the enhancing qualitative characteristics of useful financial
information contained in the IASB’s Conceptual Framework for Financial
Reporting are understandability and comparability.
Required:
Explain the meaning and purpose of the above characteristics in the context of
financial reporting and discuss the role of consistency within the characteristic of
comparability in relation to changes in accounting policy.
(9 Marks)

[TOTAL: 25 MARKS]
QUESTION 8
Katuruturu Ltd, a company incorporated on 1 January 2019, decided to change its
policy for the valuation of inventories from the first in, first out method to the
weighted average cost method. The company’s financial year ends on 31
December. The following information (prior to accounting for any changes in
policies) was extracted from the statements of profit or loss and other
comprehensive income for the year ended 31 December.
2021 2020
$ $
Revenue 1 600 000 1 300 000
Cost of sales (800 000) (520 000)
Other expenses (520 000) (498 000)
Profit before tax 280 000 282 000
Income tax expense (current) (89 000) (102 200)
Profit for the year 191 000 179 800
Other comprehensive income - -
Total comprehensive income 191 000 179 800

12
Dividends declared and paid according to the statement of changes in equity for
the years ended 31 December were 2021: $20 000 2020: $10 000
The information regarding the change in accounting policy in respect of inventories
(closing balances) is as follows:

2021 2020 2019

$ $ $
Weighted average cost (new method) 220 000 280 000 240 000
First in, first out (old method) 180 000 260 000 260 000
Retained earnings at the beginning of the year, before taking any change in
accounting policy into account, amounted to $24 000 in 2020 and $193 800 in 2021.
Ignore any income tax consequences of the change in accounting policy.
Required:
a) Redraft the statement of profit or loss and other comprehensive income for
the years ended 31 December 2021 and 2020 and the statement of changes in
equity for the year ended 31 December 2021 reflecting the change in accounting
policy. Include notes or explanations to the financial statements, if any.
(18 Marks)
b) Discuss the circumstances under which it may be appropriate to change an
accounting policy. (7 Marks)
[TOTAL: 25 MARKS]

QUESTION 9
Several accounting standards require or permit the use of fair values in measuring
assets and liabilities. However, there has not always been consistency between
these standards regarding the method of arriving at fair value. International
Financial Reporting Standard (IFRS) 13 was issued as an attempt to remedy this
problem. The IFRS aims to define fair value, sets out a framework for measuring
fair values and standardises disclosures about the use of fair values by entities in
their financial statements. It does not attempt to give guidance regarding the use
of the resulting fair value figures, leaving this to the relevant standard dealing

13
with the asset or liability in question. IFRS 13 makes it clear that fair value is
market-based as opposed to being entity-specific. Hence the intentions of an
entity regarding an asset or liability are not relevant when determining fair values.
Gawanzara Ltd is an entity with a 31 December reporting date. Gawanzara Ltd has
several assets that are measured at fair value and the following details in respect
of the year ended 31 December 2021 are available:
1. Investment properties
Gawanzara Ltd has an office building that is rented out to third parties. The fair
value of the building was $5 600 000 as at 31 December 2020. Its current use, the
present value of the net cash flows of future earnings was calculated at $5 700 000
on 31 December 2021. On 31 December 2021, this building could be sold in the
open market for $6 100 000 before transaction costs of 2%. This open market value
was determined with reference to similar buildings situated in the same location
that are currently in the market.
2. Listed share investments
On 31 December 2021, Gawanzara Ltd’s listed investments, consisting equity
investments, had a total net market value of $2 623 500 after brokerage fees of 1%
were deducted. These investments are traded in the active market. The fair value
of these investments was $2 510 000 as at 31 December 2020. These investments
were classified as measured at fair value through profit or loss.
3. Assets held for sale
On 31 December 2021, Gawanzara Ltd had a machine with a carrying amount of
$350 000, that was held for sale. The machine was written down to fair value of
$260 000, less costs to sell of 10%, resulting in a loss, which was included in profit
or loss for the year. The value in use was lower and was calculated at $212 000.
Required:
a) Discuss the meaning of ‘fair value’. (8 Marks)
b) Outline the three level hierarchy proposed by IFRS 13 to evaluate
informational inputs into the measurement of fair value. (8 Marks)
c) Show how you would measure the fair values of Gawanzara Ltd’s investment
properties, listed share investments and assets held for sale for inclusion in
financial statements. Indicate in each case the level of the inputs used. (9 Marks)
[TOTAL: 25 MARKS]
14
QUESTION 10

The following trial balance was extracted from the books of Jembajemba Ltd on 31
December 2021.
Note Dr Cr
$000 $000
Revenue 460 000
Cost of sales 195 000
Distribution costs 65 000
Administration expenses 42 000
Investment property 1 300 000
Equity investment at cost 2 42 000
Interim dividends 66 000
Land and buildings at cost 3 400 000
Plant and equipment at cost 3 650 000
Accumulated depreciation (1 January 2021): 3 120 000
Land and buildings
Accumulated depreciation (1 January 2021): 3 310 000
Plant and equipment
Development expenditure 4 80 000
Suspense account 5 13 000
Trade receivables 70 000
Inventory at 31 December 2021 66 000
Cash and bank 99 000
Trade payables 46 000
Share premium account 150 000
Ordinary shares of $0.10 each 7 500 000
8% Debenture (issued on 1 February 2021) 8 120 000
Retained earnings at 1 January 2021 382 000
2 088 000 2 088 000

The following notes are also relevant:

15
1. Investment properties are accounted for under the fair value model of
International Accounting Standard (IAS) 40. The figure included in the trial balance
represents the fair value of these properties at 1 January 2021. The fair value of
these properties at 31 December 2021 was $265 000 000.
2. The figure for investments represents the cost of equities purchased during
the year. As permitted by International Financial Reporting Standard (IFRS) 9, an
election was made at the date of purchase to account for any fair value gains and
losses on these equity instruments through “other comprehensive income”. The
fair value at 31 December 2021 was $47 500 000.
3. Land and buildings are carried under the cost model as permitted by IAS 16.
The land cost included in the trial balance figure for land and buildings is $100 000
000. The buildings were originally deemed to have had a useful economic life of 30
years, of which 12 had passed by 1 January 2021. During the year, a decision was
taken to change the accounting policy to apply the revaluation model from 31
December 2021. The revalued amounts at that date were certified by a qualified
valuer to be $65 000 000 for the land and $200 000 000 for the buildings.
Plant and equipment is being depreciated at 25% per annum reducing balance.
All depreciation is charged to cost of sales.
4. The development expenditure relates to amounts incurred on various
projects undertaken by the company during the year. It is estimated that the
composition of this is as follows:
$000
Research costs 15 000
Development costs (relating to projects meeting the IAS 38 criteria 37 500
for capitalisation)
Development costs (relating to projects not meeting the IAS 38 27 500
criteria for capitalisation)

5. The suspense account relates to a contingent asset recognised during the

year ended 31 December 2021, as it was considered virtually certain to be
recovered. However, developments during 2021 led to the conclusion that the

16
likelihood of recovering this amount had fallen somewhat. It is now considered 65%
is likely to be recovered. The bookkeeper was unsure what to do about this item.
6. Corporation tax for the year was estimated at $1 300 000.
7. The directors proposed a final ordinary dividend of 1.20 cents per share.
The proposal was approved prior to the reporting date. No account has been taken
of this proposal.
8. The debentures were issued during the year. Interest is payable annually in
arrears. No interest has been provided for or paid as at 31 December 2021.
Required:
a) As far as the given information permits, prepare the financial statements of
Jembajemba Ltd. Notes to the financial statements are required. (20
Marks)
b) Explain the need for a regulatory framework in financial reporting.
(5 Marks)
[TOTAL: 25 MARKS]
QUESTION 11
The following draft accounts have been prepared in respect of Covid-19 Ltd for the
year to 31 March 2021.

Statement of profit or loss and other comprehensive income for the year
ending 31 March 2021
Notes $000
Revenue 50 600
Cost of sales (31 400)
Provision for closure costs 1 (5 130)
Distribution costs (8 511)
Operating profit 5 559
Dividend from Waidei Ltd 2 200
Profit for the period 5 759

17
Statement of financial position at 31 March 2021
Notes $000
ASSETS
Tangible Non-Current Assets
Freehold property 3 15 000
Plant and equipment 4 2800
Intangible Non-Current Assets
Goodwill 5 1 100
Research and development 6 1 720
Current Assets
Inventories 7 3 250
Other current assets less liabilities 1929
Total Assets 25 799
EQUITY AND LIABILITIES
Equity
Ordinary share capital (£1 ordinary shares) 17 000
Retained earnings at 1 April 2020 3 040
Retained earnings for the year to 31 March 2021 5 759
Total Equity And Liabilities 25 799
The following further information is provided in respect of the items indicated by
Notes 1 – 7.
1. On 2 March 2021, the directors of Covid-19 Ltd made the decision to close down
a loss-making division with effect from 30 September 2021. The figure
contained in the accounts is the provision for expected losses between 1 April
2021 and 30 September 2021 together with the estimated costs associated with
the closure. At 31 March 2021, the closure decision remained confidential.
2. Covid-19 Ltd acquired 25% of the ordinary share capital of Walei Ltd on 1 April
2020 and, through representation on the board of directors, is able to exercise
a significant influence over the financial and operating policies of that
company. The profit made by Walei Ltd in the year to 31 March 2021 amounted
to $1 400 000.

18
 The purchase consideration was $9 000 000 and was satisfied by the issue of 3
million ordinary shares of £1 each in Covid-19 Ltd. No entry has been made in the
above accounts of Popayi in respect of the acquisition.
3. Covid-19 Ltd freehold property was professionally revalued on 31 March 2021 at
$22 000 000. It has been decided to use this figure in the accounts in order to
show a fairer view of the financial position of the company.
4. The accumulated depreciation on plant and equipment was $6 200.
5. This amount represents goodwill arising on the acquisition of the tangible and
intangible assets of a local business, Toendakozve Ltd, on 1 April 2020. The
goodwill is estimated to be worth $1 010 000 on 31 March 2021.
6. The balance is made up of the following:
 Development expenditure brought forward on 1 April 2020 of $1 350 000.
This was incurred to develop a new product which came on to the market
on 1 April 2020. It is estimated that the new product will prove highly
profitable for a period of nine years from that date.
 Research expenditure of $370 000 incurred during the year to 31 March
2021 in the endeavour to invent a new design for one of Covid-19 Ltd’s
leading products. The directors are convinced that this will result in the
creation of an improved design in due course.
7. The cost and net realisable value of the company’s inventories, analysed in
categories of similar items, are as follows:
Category Cost Net selling price
$000 $000
A 800 660
B 1 170 2 100
C 1 280 1 970
Required:
a) Explain the required treatment of items 1 to 7 in order to comply with the
relevant IFRs. (9Marks)
b) Prepare the accounts of Covid-19 for the year ended 31 March 2021 revised,
as appropriate, so far as the available information permits. (16 Marks)
[TOTAL: 25 MARKS]

19
QUESTION 12
The following information was obtained from the statement of profit or loss and
other comprehensive income and statement of changes in equity of Rovambira Ltd
for the year ended 31 December:
Note 2021 2020
$000 $000
Revenue 1 2 510 1 030
Cost of sales (1 250) (1 035)
Other expenses 2 (910) (770)
Other income (investment income) 3 85 120
Finance costs (30) (25)
Profit before tax 405 320
Income tax expense (75) (60)
Profit for the year 330 260
Other comprehensive income - -
Total comprehensive income for the year 330 260
Ordinary dividends paid (statements of changes inequity) 4 70 90
Retained earnings beginning of year 335 185

Additional information
1. Revenue consisted of the following:
2021 2020
$000 $000
Selling of goods 1 400 1 285
Services rendered 870 745
Profit on expropriation of land 110 -
Other sundry income 130 -
2 510 2 030

2. The following items are included in other expenses:

2021 2020
$000 $000

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Depreciation of equipment 15 25
Staff cost 150 120
Distribution costs 170 135
Administrative expenses 185 170

3. A dividend received of $80 000 for the 2021 financial year has yet to be
recorded.
4. Ordinary dividends of $55 000 declared have yet to be accounted for in the
2016 financial year.
5. The management of the company told you that the accounting estimate in
respect of the depreciation of equipment has changed and was accounted for,
since the previous pattern of depreciation differs from the actual pattern of
economic benefits from depreciable assets. The reducing balance method is
applied from 2019 at 20% per annum, instead of the straight line method over five
years. According to the reducing balance method, the depreciation for the 2019
financial year was calculated as follows:
$000
Carrying amount of asset beginning of year 75
Depreciation for the year (15)
Carrying amount end of year 60
The original cost of the equipment was $125 000.
6. During the 2020 financial year, the following error occurred: An investment
in shares purchased at a fair value of $75 000 was incorrectly recognised as
administrative expenses. The fair value of the investment remained unchanged
until the end of 2020 financial year and it was classified as at fair value through
profit or loss. This error has not yet been corrected. It is possible to open the
accounting system of the 2020 financial year for purposes of correcting this error.
7. Ignore the tax effects of any adjustments.
Required:
a) Fully account for the accounting policies, changes in accounting estimates
and errors for Rovambira Ltd. Include relevant notes, explanations and extracts in
your answer. (18 Marks)

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b) Describe the impracticability of retrospective application for the effects of
changes in accounting policies and prior period errors. (7 Marks)
[TOTAL: 25 MARKS]
QUESTION 13
The following information relates to Hegiko Ltd:
1. Hegiko Ltd is a researcher and manufacturer of electronic components. On 1
January 2021, Hegika Ltd commenced with research on a new electronic
component which will improve the working performance of motor engines.
2. On 1 March 2021 the head of research submitted an initial report to the
board of directors relating to the research on the new motor engine electronic
component. The board of directors was very positive about the potential of the
component and approved further development which commenced on 1 March 2021.
3. The accountant of Hegiko Ltd found that the development costs of the
motor engine electronic component satisfied all the criteria for asset recognition,
on 1 March 2021.
4. On 1 June 2021 Hegiko Ltd commenced with research on a component which
will improve the working performance of swimming pool pumps. The research on
the swimming pool component progressed very positively and at the end of
December 2021 the directors were very positive that this project would be a
material asset to Hegiko Ltd.
5. Of the four engineers employed by Hegiko Ltd, two worked full-time on the
research and development of the motor engine electronic component, until
commercial production commenced on 1 September 2021. Originally only one
engineer worked on the swimming pool component. After production on the motor
engine electronic component commenced on 1 September 2021, another engineer
started to work on the swimming pool component.
6. Two laboratory technicians worked on the motor engine electronic
component up to 31 August 2021 and three technicians worked on the swimming
pool component.
7. The cost of consumables is allocated to the projects based on actual usage
and amounted to $42 000 and $25 000 for the motor engine electronic component
and swimming pool component respectively. The cost of consumables is incurred
evenly throughout the time period worked on the projects.
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8. Depreciation is charged on the basis of time utilised on a project.
9. All other applicable costs are allocated based on the time engineers spend
on a project. Ignore leave and bonuses.
10. Costs incurred during 2021 were as follows:
$000
Engineers (4) 780
Laboratory technicians (6) 630
Administrative personnel (5) 500
Laboratory maintenance 90
Consumables 74
Water, electricity and services 30

11. Research and development equipment with a cost of $3 000 000 (purchased
on 1 January 2021) is written off at 20% per annum on a straight line basis.
12. Research and development equipment is utilised as follows:
01/01/2021 01/03/2021 01/06/2021
to to to
28/02/2021 31/08/2021 31/12/2021
Research activities (motor engine 50% - -
electronic component)
Development activities (motor - 50% -
engine electronic component)
Research activities (swimming pool - - 50%
component)

13. For the commercial production of the motor engine electronic component,
Hegiko Ltd bought specialised plant and machinery at a cost of $1 050 000 on 1
September 2021. The specialised plant and machinery is expected to be sold for
$150 000 after three years, and are therefore amortised on the straight line
method over three years. Upon review of the residual value and useful life of the
specialised plant and machinery at 31 December 2021, expectations in respect
thereof did not differ from previous estimates.

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14. Projections (2021 actual) for the sale of the motor engine electronic
component are as follows:
2021 2022 2023
Unit sales 100 000 350 000 150 000

15. At 31 December 2021 the company had no inventories of the motor engine
electronic component on hand.
16. With the presentation of financial statements on 31 December 2021, there
were indications that the recoverable amount of the development costs was
materially impaired. A competitor introduced a similar product to the market at a
drastically reduced price. On 31 December 2021 new calculations and estimates
showed that the discounted net cash flow before development costs are amortised
amounted to $0.80 per unit. The cost of capital (16%) of Hegiko Ltd was used as
discount rate to calculate the estimated profit per unit.
17. It is the policy of the company to amortise development costs on the basis
of units sold to total marketable units. Past experience provided persuasive
evidence that this method best reflects the pattern in which the assets economic
benefits are consumed.
18. The company presents an analysis of its expenses in the statement of profit
or loss and other comprehensive income using a classification based on their
function.
19. Assume that all intangible assets recognised are accounted for using the cost
model and that they have finite useful lives.
20. Assume all amounts to be material and ignore taxation.
Required:
a) Calculate the split between the total amount that should be capitalised and
expensed for the motor engine electronic component and the swimming pool
component for the year ended 31 December 2021. (15 Marks)
b) Determine the carrying amount of the internally generated intangible assets
of Hegiko Ltd to be presented in its financial statements. Include notes for the
accounting policy of these assets. (10 Marks)
[TOTAL: 25 MARKS]

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QUESTION 14
a) Dandemutande Ltd (Dandemutande) is a large manufacturing company.
Wherever possible, it structures its operations to take advantage of any
financial assistance available from national and regional authorities. During the
year, Dandemutande decided to relocate some of its other operations to a
regional development area, which offers attractive labour costs and tax
incentives. The regional government agreed to contribute $200 000 as a result
of Dandemutande setting up in the regional development area. There are no
particular conditions as to what the money should be spent on. The cash was
received on 1 August 2021.
Required
In accordance with IAS 20 (Accounting for Government Grants and Disclosure of
Government Assistance) explain the financial reporting treatment of the above in
the financial statements of Dandemutande for the year ended 31 December 2021.
(4 marks)
b) Describe the characteristics of an economic environment operating in
hyperinflation. (6 Marks)
c) Explain the benefits (or improvements) arising from the introduction of IFRS 17.
(15 Marks)

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