Question Tag: Valuation

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  • 7 Marks

PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

The Ministry of Indigenous Enterprises has been charged to collect legacy fixed assets data and value them in accordance with International Public Sector Accounting Standards (IPSAS). The Fixed Assets Coordinating Unit (FACU) of the Ministry has collected for valuation the following data for your action:

The Ministry owns a four (4) storey Office Administration block. The average cost per floor is GH¢4,741,256.25. The building was constructed on a land size of 20 plots of land owned by the Ministry. Currently, a plot of land in that area costs GH¢2,500,000. The FACU has measured the sizes of the building as follows:

  • Length: 87.5 meters
  • Width: 42.65 meters
  • Reference Price per Square Meter: GH¢4,432

However, a professional body, the Institute of Architects and Engineers, has given the reference price for the cost of such an office building at an estimated price of GH¢87,965,025. The building has not seen any further facelift ever since. However, a fence wall with a gate to enforce security and secure the land has just been completed in the current year at a cost of GH¢8,970,000 with a lifespan of 50 years.

The year of construction of the office building could not be determined, yet an old watchman who had been there for ages remembers that the building was constructed some 42 years ago, a time when his seventh child was born. It is the decision of the Government of Ghana on the adoption of IPSAS not to take advantage of the three-year exemption period but to account for legacy fixed assets by taking 60% of the reference cost of the legacy assets as the deemed cost, with a reduced lifespan of 30 years.

Required:

i) Calculate the cost of the land and buildings with structures to be brought into the books on the adoption of IPSAS and determine the depreciation chargeable in the first year in respect of these assets.                                                                                              ii) Show the extract of Statement of Financial Position of the Ministry of Indigenous
Enterprises as at that date

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  • 7 Marks

FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item Amount (GH¢’000) Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023) 200 Intangible asset
Costs incurred in setting up a website for a new product 20 The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life) 840 Excludes software costs
Windows operating system (for 295 PCs) 530 Perpetual software license
Microsoft Office software (for 295 PCs) 24 Three-year software license
Induction training for new staff 430 Staff training for new hires
Book rights purchased from another entity a few years ago 90 The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023 240 Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

a. Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.
What are the basic assumptions on which this model is based? (6 Marks)

b. Currently, the rate of return on the Federal Government Bond redeemable at par in the year 2018 is 5%. The securities of four companies, Akira Plc., Bombadia Plc., Courage Plc., and Divine Plc., have expected returns of 12%, 9.5%, 10.5%, and 13%, respectively. The average expected return on the market portfolio is 10%, subject to a 6% risk (standard deviation). Other relevant information relating to the four securities of the companies is as stated below:

Company Standard Deviation Correlation Coefficient
Akira Plc 0.080 0.975
Bombadia Plc 0.075 0.640
Courage Plc 0.090 0.740
Divine Plc 0.150 0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

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  • 20 Marks

FM – May 2017 – L3 – Q3 – Business Valuation Techniques

Compute Free Cash Flow to Equity and value per share using FCFE model.

LA Ltd., a food packaging company, has operated as a private company for the past 10 years. The company has been growing rapidly over the last few years. The Directors are now considering listing the company on the stock market. Preparatory to this, the Directors are interested in determining a fair price per share for the company. Assume today is November 1, 2016.

The following information has been extracted from the most recent audited financial statements of LA Ltd:

Statement of Profit or Loss, October 31, 2016

₦million
Sales Revenue 15,790
Cost of Sales (13,514)
EBITDA 2,276
Depreciation (440)
EBIT 1,836
Interest Expense (330)
Earnings Before Tax 1,506
Tax at 30% (452)
Profit After Tax 1,054

Statement of Financial Position as at October 31:

Additional Facts

  • The Directors believe that the Free Cash Flow to Equity (FCFE) model should provide an appropriate valuation for the company’s shares.
  • An investment banker has provided the following estimates of cost of capital:
    • Cost of equity: 15%
    • Post-tax cost of debt: 4%
    • WACC: 12.5%
  • The Directors believe that the FCFE will grow by 18% for the next 5 years and by 5% thereafter.
  • The company currently has 600 million shares in issue.

Required:

a. Calculate the free cash flow available to equity for the year ended October 31, 2016. (7 Marks)

b. Use the Free Cash Flow to Equity model to calculate the current value per share. (5 Marks)

c. What are the key advantages and disadvantages of stock exchange listing? (8 Marks)

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Syntax Plc., a fertilizer company, is concerned about fluctuating sales and earnings. This caused the management of the company to consider acquisition of another company in the same line of business.

In order to boost its sales and stabilize its earnings, Syntax Plc.’s management has identified Synapse Chemical Company Plc. as a possible target. Syntax proposed to acquire Synapse for a consideration of N20 million, which was agreed to by both companies.

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year Revenue (N’m) Cost of Sales (N’m) Other Expenses (N’m) Depreciation (N’m) Total Expenses (N’m) Profit Before Tax (N’m)
2015 60 30 15 5 50 10
2016 70 35 15 4 54 16
2017 78 39 15 4 58 20
2018 86 43 15 4 62 24
2019 94 47 15 4 66 28

The following information is relevant:

  1. The forecast profits have been limited to five years.
  2. All sales are for cash.
  3. The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
  4. Synapse currently has a tax liability of N4.5 million due for payment in 2015.
  5. The interest charges of N1 million of Synapse Plc. have been included in other expenses.
  6. In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

The management of Syntax Plc. has asked you, as a Financial Expert, to appraise the intended acquisition of Synapse Chemical Company Plc. and advise on the reasonableness of the acquisition. Your advice should be in the form of a report to the Board of Directors of Syntax Plc.

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  • 1 Marks

AAA – Nov 2012 – L3 – AII – Q9 – Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)

Identifies the valuation methods for non-monetary government grants under IAS 20.

IAS 20 deals with Accounting for Government Grants and Disclosure of Government Assistance. In the Standard, a grant in the form of a non-monetary asset may be valued at …………… or …………… value.

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, as its business is relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo anytime during the next 3 years. The current share price is 57 kobo, and capital growth is expected to be constant at 12 percent per annum in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert, and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts, and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of
the warrants to exercise them before expiry? What is the minimum annual
growth -rate of the share price necessary to induce holders to exercise their
warrants?
(2 Marks)

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  • 30 Marks

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.

Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year 2023 2022
N’m N’m
Non-current assets (including investment in Toba plc) 602.8 499.4
Current assets 265.0 180.4
Total Assets 867.8 679.8
Current liabilities 199.2 136.8
Total assets less current liabilities 668.6 543.0
Non-current liabilities 149.5 159.4
Net assets 519.1 383.6
Issued share capital (ordinary shares of ₦1 each) 100.0 73.6
Share premium 84.0 12.4
Profit or loss account 335.1 297.6
Total Equity 519.1 383.6
Sales revenue 1320.6 496.0
Earnings after tax 51.50 37.60
Dividend 14.0 14.0
Retained profits 37.5 23.6

All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?

(8 Marks)

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Banny Plc. (Banny) is a diversified company that has achieved its present size through vertical and horizontal acquisition. The directors have identified two potential target entities for acquisition. The first is Abana Limited (Abana), which operates a cement business near Offa, Kwara State. The second is Doha Limited (Doha), also in the cement industry, located near Oturukpo, Benue State. Banny has obtained copies of their audited financial statements, along with additional information notes.

Statement of Profit or Loss for the Year Ended December 31, 2017

Item Abana (₦’m) Doha (₦’m)
Revenue 136,000 132,000
Cost of sales (84,000) (91,900)
Gross profit 52,000 40,100
Other operating expenses (36,000) (28,000)
Profit from operations 16,000 12,100
Finance costs (6,000) (8,000)
Profit before tax 10,000 4,100
Income tax expense (3,000) (2,000)
Net profit for the period 7,000 2,100

Statement of changes in equity for the year ended December 31, 2017

Statement of financial position as at December 31, 2017

Additional Notes:

  1. Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
  2. Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.

Required:

a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)

b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)

c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.

Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:

Year to 30 September 2021 2022 2023 2024 2025+
Sales growth (%) 5% 4% 3% 2% 0%
Operating profit margin 8% 9% 10% 10% 10%
Incremental non-current asset investment (% of sales increase) 5% 6% 3% 2% 0%
Incremental working capital investment (% of sales increase) 6% 5% 4% 4% 0%

Financial Information:

  • Sales for the current year to 30 September 2020: ₦80 million
  • Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
  • Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
  • Short-term investments held: ₦0.8 million
  • Company tax rate: 20%
  • Current WACC: 10%

Required:

a. Calculate the value of APL’s equity using SVA.

(12 Marks)

b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)

(Total 15 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions

Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.

Raymond Plc. is a successful IT services company incorporated 10 years ago. It was listed on the Stock Exchange 3 years ago. The company has a broad customer base mainly consisting of small and medium-sized companies. Raymond Plc. has achieved rapid growth in recent years by obtaining regular business from satisfied customers and also by acquiring other IT services companies.

The Directors of Raymond Plc. have identified Harold Limited, an unlisted company, as a possible acquisition target. Harold Limited has a number of large multinational clients, and, in general, its clients tend to be larger than those of Raymond Plc. If successful, the acquisition would go ahead on January 1, 2018.

Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:

Financial Item Raymond Plc. Harold Limited
Share capital (Ordinary ₦1 shares) ₦150m ₦40m
Market share price ₦4.90 N/A

N/A: Not applicable (not listed).

Additional information:

  1. If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
  2. If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
  3. The average ungeared Cost of Equity for the industry is 8%;
  4. Both Raymond Plc. and Harold Limited are wholly equity financed; and
  5. Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.

The Directors of Raymond Plc. are considering offering to purchase Harold Limited at a price of ₦7.00 per share. It is estimated that transaction costs of ₦8 million would be payable on the acquisition and that ₦2 million would be required in the first year to cover the costs of integrating the two companies.

Required:

  • (a) Calculate:
    • i. The value of Raymond Plc. as at December 31, 2017.
    • ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
    • iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
  • (b)
    • i. Explain how value might be created by the proposed acquisition. (2 Marks)
    • ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
  • (c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
    • i. Harold Limited’s shareholders.
    • ii. Raymond Plc.’s shareholders. (8 Marks)

(Total 20 Marks)

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  • 15 Marks

AA – May 2017 – L2 – SC – Q5 – Internal Control Systems

Examination of internal control meaning, examples, and sources of audit evidence for completeness, ownership, and valuation.

You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and distributor of fruit juice drinks based in Lagos. A review of the previous year’s audit working papers revealed some weaknesses in internal controls with regard to safeguarding the company’s non-current assets.

The company uses a combination of both owned and leased motor vehicles for operational activities, including deliveries to customers. It has recently sold some old vehicles and bought new ones in a bid to lower motor vehicle running expenses.

During the planning of the audit, you have decided that motor vehicles will be a key area because of the likelihood of weaknesses in the company’s system of internal control over non-current assets.

You are required to:

  1. (a) Explain with suitable illustration the meaning of Internal Control. (4 Marks)
  2. (b) List FIVE examples of internal controls. (5 Marks)
  3. (c) Identify TWO sources of audit evidence you will obtain for each of the following: completeness, ownership, and valuation, to provide reasonable assurance with regard to the company’s assets and liabilities. (6 Marks)

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  • 10 Marks

FR – Nov 2015 – L2 – Q7b – Fair Value Measurement (IFRS 13)

Explaining accounting treatment for investment property and calculating values for the financial statements.

KOLA NITDA Nigeria Plc is a company engaged in the manufacturing of hand sanitizer to prevent Ebola disease. The following information relates to property owned by the company:

N’000
Land – Plot 404 Apapa Industrial Area
Building therein (acquired June 30, 2013)
Improvement to the building to extend rented floor capacity
Repairs and maintenance to investment property for the year
Rental received for the year

Approximately six percent of the property floor space is used as the administrative head office of the company. The property can be sold only as a complete unit. The remainder of the building is leased out under operating leases. The company provides lessees with security services.

The company values investment property using the fair value model on December 31, 2014, which is the company’s year-end. Tewogbade & Co. (an independent valuer) valued the property at N144,000,000 on that date.

Required:
i. Advise the Directors of KOLA NITDA Nigeria Plc on how the property should be treated in the financial statements of the company as at December 31, 2014 in order to ensure strict compliance with provisions of IAS 40. (5 Marks)
ii. Calculate the value of investment property that should be disclosed in the statement of financial position as at December 31, 2014 and the amount that should be charged to the statement of profit or loss and other comprehensive income for the period then ended. (5 Marks)

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  • 1 Marks

FA – May 2012 – L1 – SA – Q28 – Accounting for Inventories (IAS 2)

Identifying the accounting concept that guides the treatment of known losses and inventory valuation.

Borox Limited makes provision for all known losses and values its inventories at the lower of cost and net realizable value. Which accounting concept is the company complying with?

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  • 1 Marks

FA – Nov 2012 – L1 – SA – Q6 – Financial Statements Preparation

Identifying the price for returnable containers after allowing for wear and tear.

Returnable containers are charged out to the customers’ accounts when containers are sent to them. The amount placed on each container for financial statement purposes after allowing for wear and tear is …… price.

A. Charge-out
B. Return
C. Cost
D. Valuation
E. Replacement

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  • 1 Marks

FA – May 2014 – L1 – SA – Q16 – Partnership Account

Calculates the goodwill value based on super profit over five years.

The Partnership of X, Y, and Z made a net profit for the past five years as shown below:
Year Profit (₦’000)
2009 30,000
2010 18,000
2011 9,000
2012 15,000
2013 21,000

The firm intends to admit V into the business and for this purpose has decided to fair value goodwill at 4 years purchase of the average super profits over the last 5 years on a normal profit of ₦6,000,000 per annum.

What is the value of goodwill?
A. ₦42,400,000
B. ₦46,400,000
C. ₦49,200,000
D. ₦50,400,000
E. ₦62,200,000

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  • 1 Marks

FA – Nov 2021 – L1 – SA – Q20 – Partnership Accounting

This question addresses when goodwill can be valued in a partnership.

Goodwill can be valued in partnership when:
A. Partners make a profit
B. Large losses are made
C. A partner retires
D. A new branch is opened
E. A partner receives a salary

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  • 1 Marks

FA – Nov 2022 – L1 – SA – Q20 – Partnership Accounts

Identify when goodwill can be valued in a partnership.

Goodwill can be valued in a partnership when
A. Partners make profit
B. Large losses are made
C. Partner retire
D. New branch is opened
E. Partners receive salary

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  • 1 Marks

FA – Nov 2023 – L1 – SA – Q7 – Accounting for Inventories in Accordance with IAS 2

Calculate closing inventory using the FIFO method.

Using the First-In-First-Out (FIFO) method, what is the value of the closing inventory after the company issued 500 units?

  • A. ₦37,000
  • B. ₦37,500
  • C. ₦38,750
  • D. ₦42,500
  • E. ₦45,000

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