Series: MAY 2015

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  • 15 Marks

PM – May 2015 – L2 – SB – Q7 – Environmental and Social Performance Management

Discuss the concept of globalisation, its impact on management information systems, and arguments against its influence on management performance

The use of internet has made the entire universe a global village. Managers can comfortably sit in their offices connected to the internet and the world wide web to obtain all necessary information for their business needs.

Required: a. Discuss the concept of globalisation and how management information systems have enhanced effective management performance. (10 Marks)
b. What arguments will you advance against globalisation as it relates to management performance? (5 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (₦) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (₦) 4 4 4
Direct Material Cost per Kg (₦) 8 8 8
Variable Overheads (₦) 14 26 16
Fixed Overheads (₦) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

CAROSSI Limited makes quality wooden products such as tables, chairs, benches, and doors. Historically, the company has used mainly financial performance measures to assess the performance of the company as a whole. The company’s Chief Executive Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.

CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each Division is managed by a divisional manager who has the power to make all investment decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically, investment decisions have been made by calculating the Return on Investment (ROI) of any opportunities, and presently, the return on investment of each Division is 18 percent.

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

Division X Division Y
Capital required for investment (₦m) 88.2 46.0
Revenue generated from investment (₦m) 46.4 28.1
Net profit margin (%) 30 35

The company is seeking to maximise shareholders’ wealth.

Required: a. Describe the Balanced Scorecard Approach to performance measurement. (8 Marks)
b. Determine both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results and take into consideration the manager’s views about residual income. (7 Marks)

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  • 20 Marks

PM – May 2015 – L2 – SB – Q4 – Costing Systems and Techniques

Analyze the pricing policy and budget position for Badegy Limited, considering competitor price changes and cost inflation.

BADEGY Limited is a medium-sized company. The company is in the process of deciding its pricing policy for the next period.

The following information is available from its records:

Previous Period:

  • Revenue: ₦13,000,000
  • Units Sold: 100,000 at ₦130
  • Costs: ₦10,000,000
  • Profit: ₦3,000,000

Current Period:

  • Revenue: ₦13,780,000
  • Units Sold: 106,000 at ₦130
  • Costs: ₦10,774,000
  • Profit: ₦3,006,000

It was discovered that between the previous and current periods, there was a 4% general cost inflation, and it is forecast that costs will rise further by 6% in the next period. As a matter of policy, the company did not increase the selling price in the current period, although competitors raised their prices by 4% to allow for the increased costs.

A survey by a team of management consultants found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume falls by 1.5 times the rate of real price increase. Various options are to be considered by the Board.

Required: a. Show the budgeted position of the company if it maintains the ₦130 selling price for the next period when it is expected that competitors will increase their prices by 6%. (15 Marks)
b. What would the budgeted position be if the company also raises its price by 6%? (5 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Pakex is a division of an automobile group that has five years remaining on a leased premises in which it sells self-assembled motorcycles. The management is proposing an investment of ₦48 million on immediate improvements to the interior of the premises in order to stimulate sales by creating a more effective selling environment. The following information is available:

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

(iv) The management staff turnover at Pakex division is high. The division’s investment decisions and management performance measurement are currently based on the figures for the first year of the proposal.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year 1 2 3 4 5
Increase in Revenue 56 40 40 24 16

All other factors are expected to remain the same.

Required: a. Prepare a summary of the statement of the management’s investment proposal for years 1 to 5 showing Residual Income and Return on Capital Employed for each year using the straight-line depreciation method. (10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative proposal. (6 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

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  • 30 Marks

PM – May 2015 – L2 – SA – Q1 – Cost-Volume-Profit (CVP) Analysis

Analyze Tadefo Limited's activity-based costing, discuss budgeting weaknesses, and describe the advantages of ABB and ZBB.

TADEFO LIMITED is a manufacturing company which produces and assembles car components. The company has two main production departments: Machining and Assembling. Each of the two departmental managers is responsible for producing annual budgets based on targets set by the management. From last year’s budget, TADEFO Limited hoped to turn an expected 10 percent rise in total revenue into a 20 percent increase in the company’s profits.

The following budgeted information relates to TADEFO Limited for the forthcoming period:

Products Information:

Products ACQ BEZ CFJ
Sales and production (units) 30,000 50,000 40,000
Selling price (per unit) (N) 73 45 95
Prime cost (per unit) (N) 65 32 84
Machine Dept. (hrs per unit) 4 2 5
Assembly Dept. (hrs per unit) 2 7 3

Overheads Re-Analyzed into Cost Pools:

Cost Pool Amount (N’000) Cost Driver Quantity for the period
Machine services 359 Machine hours 425,000
Assembly services 328 Direct labour hours 532,000
Set-up costs 36 Set-ups 720
Order processing 165 Customer orders 34,000
Purchasing 88 Supplier’s orders 12,400
Total Overheads 976

You have also been provided with the following estimates for the period:

ACQ BEZ CFJ
Number of set-ups 220 130 210
Customer orders 18,000 10,000 10,000
Suppliers’ orders 5,200 3,600 4,200

Required: a. Prepare and present a profit statement using activity-based costing. (14 Marks)
b. What would you consider to be the weaknesses of an incremental budgeting system for a company such as TADEFO Limited? (5 Marks)
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by TADEFO Limited. (5 Marks)
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees. (3 Marks)
e. “Encouraging employee participation in budget setting is beneficial” Discuss. (3 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q7 – Taxation of Trusts and Estates

Determine computed income of a trust, tax liabilities, and apportionment of income among beneficiaries.

Chief Zeta created a Trust many years ago for the benefit of his four children, Alpha, Beta, Cepha, and Delphi. A lawyer was appointed as the Trustee to his Estate.

For the year ended 30 September 2014, the Trust income amounted to ₦3,120,000. Each of the beneficiaries receives an annuity of ₦150,000 every year while the expenses incurred on the administration of the Trust was ₦57,500 per annum. The trustee is on a remuneration of 2% of the Computed Income.

Chief Zeta instructed that discretionary payments of ₦22,500, ₦17,500, ₦15,000, and ₦12,500 respectively should be made to Alpha, Beta, Cepha, and Delphi respectively. In addition, nine of the ten portions of the remainder of the Computed Income should be shared equally among the four children.

Chief Zeta has requested you to supervise the administration of the above Trust.

You are requested to:

a. State the basis of assessment of Estates, Trusts or Settlements. (1 Mark)

b. Identify the persons chargeable to Income Tax under the Trust or Settlement created by Chief Zeta. (3 Marks)

c. Compute the income of the Trust. (3 Marks)

d. Determine the amount due to each beneficiary. (6 Marks)

e. Explain how the Computed Income should be apportioned and how the Income Tax burden will be shared by all the parties. (Ignore Withholding tax). (2 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q6 – Value-Added Tax (VAT)

Analyze VAT compliance, loss carry forward, and compute tax liabilities for Hidden Treasures Limited based on provided financial data.

HIDDEN TREASURES Limited is an agro-allied and trading organisation which specialises in Crop and Grain production, Animal husbandry, Sale and distribution of Grains (i.e. cowpeas, guinea corn, millet, rice, beans and groundnuts).

The company has been in business for many years and it has been filing annual Income Tax returns regularly except VAT returns. On 16 March 2015, the Federal Inland Revenue Service (FIRS) served a notice of Tax Audit covering 2010 – 2014 financial years.

The management believed erroneously that since it deals in VAT exempt goods, it did not need to file VAT returns on a monthly basis.

In preparation for the visit of the FIRS, the company’s management invited you on 23 March 2015, to their office and gave you the following extracts from the company’s Statement of Comprehensive Income and agreed Capital Allowances:

Year ended Agric Production (₦) Grain Distribution (₦)
Year ended 30/09/2010 Loss (770,000) (225,000)
Year ended 30/09/2011 Profit 630,000 280,000
Year ended 30/09/2012 Loss (600,000) (150,000)
Year ended 30/09/2013 Profit 990,000 140,000
Year ended 30/09/2014 Profit 30,000 120,000

Agreed Capital Allowances are as follows:

Tax Year Capital Allowance (₦)
2011 70,000
2012 65,000
2013 125,000
2014 115,750
2015 85,000

You are required to:

a. State the provisions of the VAT law with regard to rendition of returns by Vatable persons. (2 Marks)

b. Show by analysis the amount of losses carried forward under each income head shown above. (8 Marks)

c. Compute the tax liabilities for each year. (5 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q5 – Companies Income Tax (CIT)

Schedule of capital expenditure allocation for Covenant Construction Limited with assessment basis and treatment of capital expenditure.

Covenant Construction Limited commenced business on 3 August 2011, making up accounts to 31 July annually. The schedule of assets acquired prior to commencement of the business is as shown below:

Description ₦
Tractors and Grader 7,500,000
Motor vehicles for field operations 13,500,000
Construction site (Factory building) 11,250,000
Furniture, Fixtures and Fittings 778,250

Covenant Construction Limited won another contract and additional assets were purchased as stated below:

Date of Purchase Description Number of Items Cost (₦)
Nov. 2011 Plant & Machinery 3 580,000
April 2012 Motor vehicle 1 1,375,000
Aug. 2012 Building 1 1,350,000
Jan. 2013 Generator 1 450,000
June 2013 Factory extension 1 575,000
Nov. 2013 Pick-up van 2 1,050,000

At the last Board meeting, the Directors argued on what benefits will accrue to Covenant Construction Limited on Capital Expenditure incurred before and after commencement of business.

They were also interested in knowing the years that will be affected and the impact it will have on the company’s Total Profit.

You have been invited by the Finance Director of the company who asked you to look into these matters. The Finance Director has asked you to specifically address the following:

Required:

a. Prepare the schedule of Capital Expenditure Allocation and identify the Qualifying Expenditure based on which Capital Allowances are claimable: i. Normal basis of assessment (5 Marks)
ii. Revised basis of assessment (based on taxpayer’s right of election) (5 Marks)

b. Explain the treatment of Capital Expenditure acquired by Covenant Construction Limited before it commenced business on 3 August 2011. (2 Marks)

c. State the relevant tax years and corresponding basis period covered by the data above. (3 Marks)

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  • 20 Marks

TAX – May 2015 – L2 – SB – Q4 – Taxation of Partnerships and Sole Proprietorships

Calculate the chargeable income of each partner before and after the admission of a new partner and determine the basis period.

The Managing Partner of Aarinola Sunkanmi & Co., a firm of Estate Surveyors and Valuers based in Lagos, has invited you to calculate the Chargeable income of each of the firm’s partners after the admission of Mariam in 2014.

The information relating to the Partnership are as follows:

(a) The firm makes up its accounts up to 31 December of each year.

(b) Extracts from the books of account for the year ended 31 December 2014, are listed below:

Description Amount (₦)
Net profit for the year 1,380,000
Depreciation 450,000
Capital Allowances for the year 366,300
Balancing Allowance 72,500
Balancing Charge 75,480
Profit on sale of fixed assets 77,500
Legal expenses for successfully defending one of the partners for professional misconduct 14,000

(c) Other information:

(i) The THREE partners are Aarinola, Olasunkanmi and Murphiefe.

(ii) Profit sharing ratio is as follows:

  • Aarinola: 2
  • Olasunkanmi: 1
  • Murphiefe: 1

(iii) Aarinola and Murphiefe received ₦15,000 each as interest on loan per annum.

(iv) Salaries paid to each partner are as follows:

  • Aarinola: ₦140,000 per annum
  • Olasunkanmi: ₦60,000 per annum
  • Murphiefe: ₦60,000 per annum

(v) Olasunkanmi ceased to be a partner on 30 June 2014. Mariam was admitted on 1 July 2014. Mariam’s salary was fixed at ₦60,000 per annum. She also received interest on capital of ₦10,000 per annum.

(vi) Included in travelling expenses is the sum of ₦12,000 paid towards the annual vacation of Aarinola, the Principal Partner.

(vii) On Mariam’s admission in July 2014, the profit sharing ratio was changed to:

  • Aarinola: 10
  • Murphiefe: 7
  • Mariam: 3

Required:

a. Compute the Chargeable Income of each partner: i. Prior to admission of Mariam (9 Marks)
ii. Post-admission of Mariam (9 Marks)

b. State the basis period for the existing partners. (2 Marks)

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  • 20 Marks

TAX – May 2015 – L2 – SB – Q3 – Companies Income Tax (CIT)

Steps involved in changing accounting date and computing assessable profits under both old and new dates, and cessation implications.

Hopeful Limited, a manufacturing company, has been having declining profits and liquidity problems since 2010. The company changed its accounting year-end in 2010 from 31 May to 31 December.

The shareholders injected ₦10 million into the company in January 2011, which boosted its profits in 2011 and 2012.

Even with the increase in profits in 2011 and 2012, the Managing Director was of the opinion that it is better to cut the company’s losses, once and for all, by winding-up the company. However, the Finance Director disagreed and argued that since the company’s performance was now improving, it should continue to operate.

The Company’s Accountant has prepared the financial statements and the following are extracts:

Year Profits (₦)
Year ended 31 May 2009 540,000
Year ended 31 May 2010 300,000
Seven months to 31 December 2010 645,000
Year ended 31 December 2011 1,575,000
Year ended 31 December 2012 1,876,500

The Chairman of Hopeful Limited invited you to his office on 12 June 2013, to educate him on the two concepts of change of accounting date and cessation of business as well as their tax implications.

Required:

a. Identify the steps involved in the event that HOPEFUL Limited adopts the change of accounting date. (6 Marks)
b. Compute the Assessable profits for 2011 – 2013, if the option to change accounting date is accepted, using both the old and the new dates. (7 Marks)
c. Compute the Assessable profits for the relevant years if the cessation option is accepted using the normal basis and the revised basis of assessment. (7 Marks)

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  • 20 Marks

TAX – May 2015 – L2 – SA – Q2 – Personal Income Tax (PIT)

Tax compliance requirements and tax liability calculation for Mr. Sola Abijah based on employment and part-time income.

You have been approached by Mr. Sola Abijah, a political science graduate who did his compulsory National Youth Service in a media organization in 2009. On completion of National Youth Service in January 2010, he was offered a part-time job as a freelance writer in two international newspapers. He receives an income (net of Withholding tax) based on the articles he writes that are published by the newspapers. In March 2010, he joined a popular political party and served as the party’s temporary Public Relations Officer, also on a part-time income basis.

On 2 January 2012, he secured employment on full-time basis as Senior Manager, Corporate Affairs, in Jola Investment Enterprises on a salary of ₦12,000,000 per annum.

He was ignorant of the requirements for filing Tax Returns and paying tax to Government. He has been served a warning by the State Board of Internal Revenue (SBIR) to desist from non-disclosure of his other incomes, failing which, a Best of Judgement assessment may be raised on him by the tax inspector.

Mr. Abijah has approached you to provide tax advisory services in respect of his income tax compliance requirements and the likely tax liability that may be imposed on him by the SBIR.

The following additional information has been presented to you:

Requirements:

(a) State the difference between employment income and part-time income. (3 Marks)
(b) Explain why, when and to whom taxpayers are expected to file income tax returns. (5 Marks)
(c) Explain the circumstances that may arise to cause a tax authority to raise a Best of Judgement Assessment. (4 Marks)
(d) Compute the tax liability on Mr. Abijah’s Total Income. (8 Marks)

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  • 30 Marks

TAX – May 2015 – L2 – SA – Q1 – Tax Audits and Investigations

Required to prepare tax documentation and compute liabilities for BICCI Nigeria Limited in response to FIRS tax audit report.

You have been invited to make a presentation to the Board of Directors of BICCI Nigeria Limited. Your performance at the presentation will determine your appointment as the Tax Consultant to the company.

BICCI Nigeria Limited, a trading company, was incorporated on 2 March 2009. It commenced business on 2 October of the same year, making accounts up to 30 September annually. The shareholders invested N18 million in non-current assets before the company commenced business in 2009.

Other information provided:

  1. Authorized, Issued, and Fully Paid-Up Capital – N10 million.
  2. Value Added Tax (VAT) and Withholding Tax (WHT) returns filed for 2010–2013 were carried out 2 months after each transaction month.
  3. Companies Income Tax (CIT) and Tertiary Education Tax (TET) returns were filed on 30 June for the 2011 to 2014 Assessment Years.

Extracts from the accounts (2010–2013):

On 15 July 2014, FIRS inspectors visited BICCI, informing management of an upcoming tax audit on 25 August 2014. They requested the following documents:

  1. Audited Accounts (2010–2013)
  2. Bank Statements (2010–2013)
  3. Trial Balance for each year
  4. Evidence of Tax Returns filed (CIT, VAT, WHT, TET)
  5. General Ledger printouts
  6. Proof of tax payments
  7. Tax registration evidence
  8. Tax Clearance Certificates
  9. WHT Credit Notes, if any

FIRS Interim Tax Audit Report (summarized):

Item 2013 2012 2011 2010
Revenue (N’000) 25,320 21,522 13,989 7,694
VAT on Revenue 8,862 7,533 4,896 3,462
Undisclosed Revenue 16,458 13,989 9,093 4,232
Directors’ Current Account 19,578 21,228 19,250 18,000
Payments under WHT:
– Directors’ Fees 1,625 2,125 1,145 960
– Rent 3,500 3,500 2,625 2,625
– Professional Fees 1,200 1,200 950 950
– Commission 2,825 1,875 970 376

Additional Adjustments:

  1. Cost of Sales written back: 60%
  2. Selling & Distribution expenses written back: 60%
  3. Admin expenses written back: 60%

Requirements:

a. List the documents required by FIRS for the Interim Tax Audit. (3 Marks)
b. Calculate BICCI Nigeria Limited’s potential tax liabilities per the Interim Tax Audit. (12 Marks)
c. Prepare a schedule for VAT and WHT receipts collected by BICCI. (7 Marks)
d. Advise management on possible tax consequences if they do not respond to the audit. (8 Marks)

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  • 15 Marks

FR – May 2015 – L2 – SB – Q7 – Consolidated Financial Statements (IFRS 10)

Identify and explain events after the reporting period, discuss treatment of liquidation and dividends under IAS 10.

(a) There is usually a lead time between the end of an entity’s accounting year and when the financial statements are approved and signed off by the directors. In between this period, there are two types of events according to IAS 10-Events After The Reporting Period, which may require consideration when preparing financial statements.

Required:
Identify and explain these events and state how they are treated in the financial statements. (4 Marks)

(b) Company A is indebted to company B to the tune of N50,000,000. The financial year-end of company B is 30 June 2014. On 30 July 2014, company B received a letter from a liquidator advising it that company A has gone into insolvency. The letter revealed that company A ceased operations a month ago and that company B is only likely to receive a liquidation dividend of 20k for every naira owed by company A. It is the normal practice of company B’s board to approve the audited financial statements three months after the financial year end.

Required:

  1. Explain how the above transactions should be treated in the financial statements of company B in accordance with IAS 10-Events After The Reporting Period. (2 Marks)
  2. Prepare journal entries that are required to adjust company B’s financial statements to account for the above event. (2 Marks)
  3. State what would have been the treatment in the financial statements assuming it was fire that destroyed company B’s factory building on 30 July 2014. (3 Marks)

(c) The directors of XYZ Plc declared that a dividend of N1 per ordinary share be paid to shareholders on the company’s register as at 15 April 2014. The financial statements were approved by the company’s board on 30 May 2014. The shareholders, at the company’s annual general meeting held on 15 June 2014, approved the payment of the dividend to eligible shareholders on 1 July 2014.

Required:
Explain how the dividend proposed by the Directors should be treated in the financial statements of XYZ Plc in accordance with IAS 10. (4 Marks)

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  • 15 Marks

FR – May 2015 – L2 – SB – Q6 – Associates and Joint Ventures (IAS 28)

Explain the equity method, conditions for discontinuation, and evaluate types of audit evidence.

(a) IAS 28 – Investments in Associates and Joint Ventures permits the application of the equity method when accounting for investments in associates and joint ventures.

Required:
Explain briefly the Equity Method and state the circumstances under which an entity can discontinue the use of the equity method under IAS 28. (5 Marks)

(b) Agbantara Plc. acquired equity shares from Odinma Plc. and Dangari Limited. The following are the Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2014 for the three companies:

Company Agbantara Plc. Odinma Plc. Dangari Ltd
Revenue N4,500 N1,350 N630
Cost of Sales (N2,430) (N720) (N270)
Gross Profit N2,070 N630 N360
Admin Expenses (N1,350) (N180) (N135)
Finance Income N135 N90 –
Finance Costs (N180) – (N90)
Profit Before Tax N675 N540 N135
Income Tax Expense (N225) (N135) (N45)
Profit for the Year N450 N405 N90

Other Comprehensive Income:

  • Gains on Property Revaluation (Net of Tax):
    • Agbantara Plc: N180
    • Odinma Plc: N90
    • Dangari Ltd: N45

Total Comprehensive Income for the Year:

  • Agbantara Plc: N630
  • Odinma Plc: N495
  • Dangari Ltd: N135

Additional Information:
(i) Agbantara Plc. acquired 72 million ordinary shares in Odinma Plc. out of its 120 million ordinary shares at a nominal par value of N1 each for N160 million. The shares were acquired four years ago when Odinma Plc. had a N15 million credit balance in retained earnings. During the year, Odinma Plc. sold goods costing N38 million to Agbantara Plc. for N45 million, which remain unsold at year-end.
(ii) Agbantara Plc. acquired 35,000,000 ordinary shares in Dangari Limited out of 100,000,000 ordinary shares. The shares were acquired three years ago when the company had a credit balance on its retained
earnings of N10,000,000.
(iii) Agbantara Plc’s group policy is to measure non-controlling interests (NCI) at fair value. NCI at acquisition date in Odinma Plc. at fair value was N48,000,000. Impairment test carried out on the goodwill relating to Odinma Plc. and investment in Dangari Limited at year end resulted in N10,000,000 and N15,000,000 losses respectively.

Required:
Calculate Agbantara Plc.’s share of profits from Odinma Plc., considering the unrealized profit. (5 Marks)

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  • 15 Marks

FR – May 2015 – L2 – SC – Q5 – Impairment of Assets (IAS 36)

Discuss intangible assets, characteristics and recognition of goodwill, development cost conditions, and calculate goodwill on consolidation.

IAS 38 – Intangible Assets, specifies the criteria that must be met before an intangible asset can be recognised by an entity in its Financial Statements. Intangible assets are identifiable non-monetary assets without physical substance and include goodwill, brands, copyright and research and development expenditure. They could be
purchased and/or internally generated.
Required:

(a) Identify any TWO characteristics of goodwill which distinguish it from other intangible assets. (2 Marks)

(b) Explain THREE differences between purchased goodwill and non-purchased goodwill. (3 Marks)

(c) Identify any THREE conditions that must be met under IAS 38 for development expenditure to be recognised as an intangible asset. (3 Marks)

(d) State any FOUR factors to be considered when determining the useful life of an intangible asset. (4 Marks)

(e) Calculate the goodwill on consolidation from the information below:
Parent has 80% interests in subsidiary.

Item Amount (N’000)
Parent’s cost of investment in subsidiary 299,700
Fair value of non-controlling interest at acquisition date 169,500
Net asset at acquisition date (subsidiary) 345,800
Impairment of goodwill 62,200

Required: Compute the goodwill on consolidation. (3 Marks)

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  • 20 Marks

FR – May 2015 – L2 – SB – Q4 – Earnings Per Share

Calculate Basic and Diluted Earnings Per Share for Kubua Plc, factoring in share options.

(a) The following information is extracted from the financial statements of Kubua Plc for the year ended 30 September 2014:

Item Amount (N’000)
Ordinary Share Capital (fully paid at 1.25 kobo each) 20,000
Operating Profit before Tax 4,000

Other relevant information:

  1. The company’s income tax rate is 30%.
  2. The average fair value of one ordinary share during the year was N5.00.
  3. During the year, the company issued share options for 2.5 million ordinary shares to existing shareholders at an exercise price of N4.00.

Required:
Calculate the basic and diluted Earnings Per Share for the year ended 30 September 2014. Show all workings. (5 Marks)

(b) Extract from the Statements of Profit or Loss and Other Comprehensive Income of Bajulaye Plc. for the years ended:

Date 30/09/2014 (N’000) 30/09/2013 (N’000)
Revenue 5,000 2,800
Profit Before Interest and Taxes (PBIT) 2,500 1,200

Extract from the Statements of Financial Position as at:

Date 30/9/2014 (N’000) 30/9/2013 (N’000)
Issued Share Capital (Ordinary Shares at 50k each) 3,000 3,000
12% Redeemable Preference Shares 1,500 1,500
Total Equity 4,500 4,500

Other relevant information:

  • On 1 January 2013, the entity issued convertible loan notes of N2,000,000 with an effective interest rate of 10% per annum.
  • The loan notes are convertible at nominal values of N100 each into the following number of ordinary shares:
    • 30 September 2018: 130 shares
    • 30 September 2019: 125 shares
    • 30 September 2020: 114 shares
    • 30 September 2021: 105 shares
  • Company income tax rate is 30%.

Required:

  1. Calculate the basic and diluted Earnings Per Share for the year ended 30 September 2014. (8 Marks)
  2. Write a short memo to the Board of Directors of Bajulaye Plc explaining FOUR advantages and THREE limitations of Earnings Per Share as a performance indicator to users of financial statements. (7 Marks)

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  • 20 Marks

FR – May 2015 – L2 – SB – Q3 – Statement of Cash Flows (IAS 7)

Calculate and analyze financial ratios and prepare cash flows from operating activities for Galadanci Plc.

(a) Galadanci Plc, a telecommunications company, has the following financial statements for the years ending 31 December 2013 and 2014. Using the statements below, calculate specific ratios and analyze Galadanci Plc’s performance:

Statements of Profit or Loss and Other Comprehensive Income for the year ended

2014 (N’billion) 2013 (N’billion)
Revenue 2,430 1,638
Cost of Sales (1,701) (983)
Gross Profit 729 655
Administrative Costs (311) (180)
Distribution Costs (207) (117)
Finance Costs (36) (6)
Profit before Taxation 175 352
Income Tax Expense (54) (102)
Profit for the Year 121 250

Statements of Financial Position as at 31 December

Additional Information for 2014

  1. Galadanci Plc acquired 60% of Papanga Plc’s shares to diversify into agriculture.
  2. The company increased its mobile subscriber base, raising the average revenue per user.
  3. No dividends were received from Papanga Plc, and the share value remained constant.

Required:

  1. Calculate the following ratios for the year ended 31 December 2014, analyze Galadanci Plc’s performance, and comment on qualitative factors impacting the company:
    • Gross Profit Percentage
    • Return on Capital Employed (where capital employed = Total Assets – Current Liabilities)
    • Net Profit (PBIT) Percentage
    • Asset Turnover
    • Gearing Ratio
    • Debt/Equity Ratio (16 Marks)
  2. Prepare Galadanci Plc’s Cash Flows from Operating Activities using the indirect method according to IAS 7. (4 Marks)

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  • 20 Marks

FR – May 2015 – L2 – SB – Q2 – Property Plant and Equipment

Determine disclosure requirements for separate financial statements and calculate equity, non-controlling interests, goodwill, and property valuation adjustments.

(a) When a parent company elects not to prepare consolidated financial statements and instead prepares separate financial statements, what are the disclosure requirements stipulated in IAS 27 on Separate Financial Statements? (6 Marks)

(b) Kerewanta Plc acquired 60% of the equity shares of Orijinmi Plc through a share exchange (three shares in Kerewanta Plc for four shares in Orijinmi Plc). The share value of Kerewanta Plc at the acquisition date (April 1, 2013) was N10 per share. Additionally, Kerewanta Plc would make a deferred cash payment of 70k per acquired share on April 1, 2014. Kerewanta Plc’s cost of capital is 12% per annum, with the following information extracted as of March 31, 2014:

Additional Information:

  1. An equipment in Orijinmi Plc had a fair value of N360,000,000 above its carrying amount with a four-year remaining life. The group uses straight-line depreciation.
  2. Orijinmi Plc had an unrecorded deferred tax liability of N10,000,000 as of March 31, 2014, with no goodwill impairment.
  3. Non-controlling interests are valued at fair value at acquisition. Fair value of Orijinmi Plc’s non-controlling interests at acquisition was N6 per share.

Required: Calculate the following as at March 31, 2014:

  1. Equity
  2. Non-controlling Interests
  3. Consolidated Goodwill
  4. Property, Plant, and Equipment (14 Marks)

 

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