Topic: Preparation of Financial Statements

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FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

Question

The difference between debt and equity in an entity’s statement of financial position is not easily distinguishable for preparers of financial statements. Debts and equity financial instruments may have similar characteristics, which may lead to inconsistency of reporting.

Required:

Discuss the main distinguishing features in the presentation of debt and equity under International Financial Reporting Standards (IFRS) with clear examples.
(10 Marks)
Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statement.
(5 Marks)

Answer

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Tags: Classification, Consistency, Debt, Equity, Financial instruments, IFRS, Presentation
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2017

FR – May 2022 – L2 – SA – Q1 – Preparation of Financial Statements

Prepare a statement of profit or loss, comprehensive income, changes in equity, and financial position for Endtime PLC.

Question

Endtime PLC is a company based in Benin with the following trial balance for the year ended December 31, 2020:

Additional Information:
(i) Finance costs include full year dividends on preference shares and ordinary share dividends of 2½ kobo paid at the end of the year. Allowances for 4 doubtful debts are no longer necessary as customers paid as at when due from time to time in the past 2 years.

(ii) Severely damaged inventories, which cost N790,000,000 were included in the inventories in the trial balance. This will need to be repaired at a cost of N440,000,000 before a knowledgeable buyer will be interested to pay N940,000,000 at arm’s length transaction.

(iii) As at December 31, 2020, a valuer based in Victoria Island in Lagos was contacted by the company to review its land and buildings. The land and buildings was revalued upward by N13,000,000,000 and a certificate was issued to this effect. The board of directors approved the valuation but it has
not yet been accounted for in the trial balance. The valuer advised that the remaining useful life of the asset is reasonably and reliably estimated to be 20 years. Depreciation is on straight-line basis.

(iv) Depreciation on plant and equipment is charged at 15% on reducing balance basis. The multi-users S&P and Sage was bought on September 30, 2020. The amortisation is at the rate of 12.5% annually. The amortisation is evenly distributed over the year. Besides, software installation, customisation and
handling cost of N800,000,000, training costs of N900,000,000, consultancy fee of N600,000,000 and other general overheads of N850,000,000 on the new software were included in administrative expenses. All depreciations are treated as administrative costs.

(v) On December 30, 2020, a chartered surveyor valued investment property at N14,000,000,000 and the company uses fair value model in IAS 40 – Investment Property.

(vi) Current income tax has been estimated for the year ended December 31, 2020 at N9,000,000,000 and deferred tax provision as at December 31, 2020 is to be adjusted in the income statement to reflect the tax base of the company’s net assets of N12,000,000,000 less than the carrying amounts. The current
company income tax rate is 30%.

vii) The plant held for sale is valued in the trial balance at its carrying amount. A broker is readily available to buy the plant for N6,000,000,000 at a fee of 6% of sales proceed. The sale would take place in January, 2021. Any necessary adjustment is to be treated as cost of sales.

You are required to prepare:
a. Statement of profit or loss and other comprehensive income for the year ended December 31, 2020. (13 Marks)
b. Statement of changes in equity for the year ended December 31, 2020. (4 Marks)
c. Statement of financial position as at December 31, 2020. (13 Marks)

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2022

FA – May 2014 – L1 – SB – Q5 – Preparation of Financial Statements

Preparation of profit and loss statement and statement of financial position for Gowell Limited.

Question

The following balances were extracted from the books of Gowell Limited as at 31 December 2012 after the preparation of the Trading account:

Item	N’000
Share capital: Authorised, issued, and fully paid: 300 million ordinary shares of N1 each	300,000
Cash at bank and in hand	750
Inventories as at 31 December 2012	91,800
Trade receivables	28,657
Trade payables	22,513
Gross profit from trading account	193,413
Revenue reserve as at 1/1/2012	50,000
Salaries and wages	42,645
Prepayments	900
Bad debts	750
Accrued expenses	789
Directors’ current account	3,750
Finance cost	900
Rents and insurance	2,280
Sundry expenses	6,150
6% Loan notes	30,000
Electricity	1,965
Postages and telephones	1,200
Motor vehicle (cost N37.5 million)	22,500
Office fittings and equipment (cost N98.25 million)	63,525
Retained earnings as at 1 January 2012	33,450
Land and buildings	369,893

Additional Information:
(i) Office fittings and equipment to be depreciated at 15% per annum on cost and motor vehicles at 20% on cost.
(ii) Provisions are to be made for:

Directors’ fees N12,000,000
Audit fees N5,000,000
(iii) N822,000 in respect of electricity consumed up to 31 December 2012 has not been posted to the ledger.
(iv) The Directors have recommended that N30,000,000 be transferred to revenue reserves.

You are required to prepare:
a. The Statements of Profit and Loss of Gowell Limited for the year ended 31 December 2012.
b. The statement of financial position as at 31 December 2012.

Answer

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Level: Level 1

Topic: Preparation of Financial Statements
Series: MAY 2014

FR – May 2020 – L2 – Q1a – Consolidated statement of profit or loss and OCI

Prepare a consolidated statement of profit or loss and other comprehensive income for Naa Ltd and its subsidiary, Shormeh Ltd, for the year ended 30 September 2019.

Question

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Level: Level 2

FR – May 2020 – L2 – Q3a – Preparation of Statement of Profit or Loss

Prepare the statement of profit or loss for Badu Trading Ltd for the year ended 31 May 2020.

Question

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – May 2020 – L2 – Q3b – Statement of Financial Position

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Question

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – May 2020 – L2 – Q3c – Statement of Changes in Equity

Prepare a statement of changes in equity for Badu Trading Ltd, including dividends, revaluation reserves, and retained profits adjustments for the year ending May 31, 2020.

Question

Prepare the following information in a form suitable for publication for Badu Trading Ltd’s financial statements for the year ended 31 May 2020.

c) Statement of changes in equity. (6 marks)

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – Nov 2020 – L2 – Q1a – Consolidated Statement of Profit or Loss

Prepare the consolidated statement of profit or loss and other comprehensive income for Kingdom Ltd Group for the year ending 31 December 2019.

Question

Statement of profit or loss and other comprehensive income for the year ended 31 December 2019 of Kingdom Ltd and Paradise Ltd.

Description	Kingdom Ltd (GH¢000)	Paradise Ltd (GH¢000)
Revenue	125,200	60,000
Cost of sales	(91,600)	(48,000)
Gross profit	33,600	12,000
Distribution costs	(4,000)	(2,400)
Administrative expenses	(7,000)	(3,600)
Finance costs	(400)	0
Profit before tax	22,200	6,000
Income tax expenses	(6,200)	(2,000)
Profit for the year	16,000	4,000
Other comprehensive income: Gain on revaluation of property	3,000	0
Total comprehensive income	19,000	4,000

Statement of financial position as at 31 December 2019

Description	Kingdom Ltd (GH¢000)	Paradise Ltd (GH¢000)
Assets
Non-current assets:
Property, plant, and equipment (PPE)	37,400	27,800
10% loan note	2,000	0
Total non-current assets	39,400	27,800
Current assets:
Inventory	8,600	2,400
Trade receivables	9,400	5,000
Bank	0	600
Total current assets	18,000	8,000
Total assets	57,400	35,800

Additional relevant information:
i) Kingdom Ltd acquired 60% of the share capital of Paradise Ltd on 1 April 2019. The purchase consideration was settled by a share exchange transaction of two shares in Kingdom Ltd for every three acquired shares in Paradise Ltd. The share price of Kingdom Ltd at the acquisition date was GH¢3 per share. In addition, Kingdom Ltd will also pay cash consideration of GH¢0.275 on 1 April 2020 for each acquired share in Paradise Ltd. Kingdom Ltd’s cost of capital is 10% per annum. None of the consideration has been recorded by Kingdom Ltd.

ii) The fair values of Paradise Ltd’s net assets and liabilities were equal to their carrying amounts at the date of acquisition with the exception of Paradise’s property, which had a fair value of GH¢8 million above its carrying amount. For the purpose of consolidation, this led to an increase in depreciation charges (in cost of sales) of GH¢200,000 in the post-acquisition period to 31 December 2019. Paradise Ltd has not incorporated the fair value of property increase into its entity’s financial statements.

iii) The policy of Kingdom Ltd group is to value all properties to fair value at each year end. On 31 December 2019, the increase in Kingdom Ltd’s property has already been recorded. However, a further increase of GH¢1.2 million in the value of Paradise Ltd’s property since its value at acquisition to 31 December 2019 has not yet been recorded.

iv) Kingdom Ltd made sales to Paradise Ltd throughout the year 2019 and it had consistently been GH¢600,000 per month. Kingdom Ltd made a mark-up of 25% on all of these sales. A total of GH¢1.2 million (at cost to Paradise) of Paradise Ltd’s inventory at 31 December 2019 had been supplied by Kingdom Ltd during the post-acquisition period.

v) At 31 December 2019, Kingdom Ltd had a trade receivable balance owing from Paradise Ltd of GH¢2.4 million. However, this did not agree to the equivalent trade payable of Paradise Ltd as a result of a payment by Paradise Ltd of GH¢800,000 made in December 2019, which did not reflect in Kingdom Ltd’s bank account until 4 January 2020. Kingdom Ltd’s policy for cash timing differences is to adjust the parent’s financial statements.

vi) Kingdom Ltd on December 2019, accepted a GH¢1 million 10% loan note from Paradise Ltd.

vii) At 31 December 2019, the goodwill that arose on acquisition was impaired by GH¢1 million. Kingdom Ltd has a policy of treating goodwill impairment as part of administrative expense.

viii) It is the policy of Kingdom Ltd group to value the non-controlling interest at fair value. For this purpose, Paradise Ltd’s share price was trading at GH¢2.50 each at the acquisition date.

ix) Assume that all items of income and expenditure accrue evenly throughout the year except where indicated otherwise.

Required:
a) Prepare the consolidated statement of profit or loss and other comprehensive income for Kingdom Ltd group for the year ended 31 December 2019. (10 marks)

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: NOV 2020

FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

Question

Odwira Ltd operates in the mining industry with a financial year end 31 December 2020. On 1 January 2020, Odwira Ltd began to lease a group of machines that were used in the production process. The lease was for five years, and the total annual rental (payable in arrears) was GH¢8 million. The lessor paid GH¢30 million for the machines on 31 December 2019. The lessor has advised Odwira Ltd that the interest rate implicit in the lease can be taken as 10%. The estimated useful economic life of the machines was five years.

Required:
In accordance with IFRS 16: Leases, show the accounting treatment of the above transaction.

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2021

FR – May 2021 – L2 – Q3 – Statement of Profit or Loss

Prepare financial statements based on the provided trial balance.

Question

The following trial balance relates to Koli Ltd for the year ended 31 December, 2020.

Description	Debit (GH¢’000)	Credit (GH¢’000)
Sales	128,000
Purchases	75,000
Distribution expenses	8,000
Administrative expenses (Note ii)	22,000
License (Note iii)	5,000
Inventories at 31 December 2019	26,200
Finance costs on a long-term loan	3,000
Income tax (Note iv)		200
Deferred tax (Note iv)		6,000
Dividend paid on equity shares		2,000
Property, Plant and Equipment (PPE)	57,000
Provision for depreciation on PPE		10,790
Trade receivables	52,000
Bank balances	33,790
Trade payables		12,000
Provision for legal costs (Note ii)	10,000
Long-term loan		40,000
Stated capital		50,000
Retained earnings as at 31 December 2019		27,000
Total	283,990	283,990

Additional information:

i) The carrying value of inventories on 31 December 2020 was GH¢23 million.

ii) Administrative expenses include a provision of GH¢10 million for the possible costs of a legal claim lodged against Koli Ltd by one of its customers before 31 December 2020. The directors of Koli Ltd consider that it is probable that Koli Ltd can successfully defend the case, but they are providing for the worst possible outcome on the grounds of prudence. The provision of GH¢10 million is for the amount sought by the customer (GH¢9.6 million) plus the directors’ best estimate of the legal costs incurred in defending the case.

iii) On 1 January, 2020, Koli Ltd paid GH¢5 million for a ten-year export license.

iv) The estimated income tax on the profits for the year to 31 December 2020 is GH¢2.5 million. During the year, GH¢2.2 million was paid in full and in the final settlement of income tax on the profits for the year ended 31 December 2019. The statement of financial position on 31 December 2019 had included GH¢2.4 million in respect of this tax liability. A transfer of GH¢1.4 million is required to increase the deferred tax liability in the statement of financial position; GH¢900,000 of this amount was necessary due to the taxable temporary difference caused by the property revaluation (see note v below).

v) The details of property, plant and equipment are as follows:

Component of PPE	Cost (GH¢’000)	Accumulated Depreciation (GH¢’000)	Carrying Amount (GH¢’000)
Land	12,000	0	12,000
Buildings	18,000	3,240	14,760
Plant and Equipment	27,000	7,550	19,450
Total	57,000	10,790	46,210

Estimate of useful economic life (at the date of purchase) of PPE components:

Land: nil (infinite life)
Building: 50 years
Plant and Equipment: 4 years

Depreciation of property, plant and equipment is allocated as follows:

80% to cost of sales
10% to distribution expenses
10% to administrative expenses

On 1 January, 2020, the directors of Koli Ltd decided to revalue its property (Land and Building) to its market value of GH¢40 million, including GH¢19.5 million for the Land. The original estimate of the useful economic life of the property was still considered valid. The directors wish to make an annual transfer of excess depreciation from the revaluation reserve to realized profits following the revaluation.

Required:
Prepare for Koli Ltd,
a) The Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2020. (8 marks)
b) The Statement of Changes in Equity for the year ended 31 December 2020. (4 marks)
c) The Statement of Financial Position as at 31 December 2020. (8 marks)

(Total: 20 marks)

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2021

FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

Question

Required:

Discuss the main distinguishing features in the presentation of debt and equity under International Financial Reporting Standards (IFRS) with clear examples.
(10 Marks)
Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statement.
(5 Marks)

Answer

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Tags: Classification, Consistency, Debt, Equity, Financial instruments, IFRS, Presentation
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2017

FR – May 2022 – L2 – SA – Q1 – Preparation of Financial Statements

Prepare a statement of profit or loss, comprehensive income, changes in equity, and financial position for Endtime PLC.

Question

Endtime PLC is a company based in Benin with the following trial balance for the year ended December 31, 2020:

(v) On December 30, 2020, a chartered surveyor valued investment property at N14,000,000,000 and the company uses fair value model in IAS 40 – Investment Property.

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2022

FA – May 2014 – L1 – SB – Q5 – Preparation of Financial Statements

Preparation of profit and loss statement and statement of financial position for Gowell Limited.

Question

The following balances were extracted from the books of Gowell Limited as at 31 December 2012 after the preparation of the Trading account:

Item	N’000
Share capital: Authorised, issued, and fully paid: 300 million ordinary shares of N1 each	300,000
Cash at bank and in hand	750
Inventories as at 31 December 2012	91,800
Trade receivables	28,657
Trade payables	22,513
Gross profit from trading account	193,413
Revenue reserve as at 1/1/2012	50,000
Salaries and wages	42,645
Prepayments	900
Bad debts	750
Accrued expenses	789
Directors’ current account	3,750
Finance cost	900
Rents and insurance	2,280
Sundry expenses	6,150
6% Loan notes	30,000
Electricity	1,965
Postages and telephones	1,200
Motor vehicle (cost N37.5 million)	22,500
Office fittings and equipment (cost N98.25 million)	63,525
Retained earnings as at 1 January 2012	33,450
Land and buildings	369,893

Additional Information:
(i) Office fittings and equipment to be depreciated at 15% per annum on cost and motor vehicles at 20% on cost.
(ii) Provisions are to be made for:

Directors’ fees N12,000,000
Audit fees N5,000,000
(iii) N822,000 in respect of electricity consumed up to 31 December 2012 has not been posted to the ledger.
(iv) The Directors have recommended that N30,000,000 be transferred to revenue reserves.

You are required to prepare:
a. The Statements of Profit and Loss of Gowell Limited for the year ended 31 December 2012.
b. The statement of financial position as at 31 December 2012.

Answer

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Level: Level 1

Topic: Preparation of Financial Statements
Series: MAY 2014

FR – May 2020 – L2 – Q1a – Consolidated statement of profit or loss and OCI

Prepare a consolidated statement of profit or loss and other comprehensive income for Naa Ltd and its subsidiary, Shormeh Ltd, for the year ended 30 September 2019.

Question

Answer

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Level: Level 2

FR – May 2020 – L2 – Q3a – Preparation of Statement of Profit or Loss

Prepare the statement of profit or loss for Badu Trading Ltd for the year ended 31 May 2020.

Question

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – May 2020 – L2 – Q3b – Statement of Financial Position

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Question

Prepare the statement of financial position for Badu Trading Ltd for the year ended 31 May 2020.

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – May 2020 – L2 – Q3c – Statement of Changes in Equity

Prepare a statement of changes in equity for Badu Trading Ltd, including dividends, revaluation reserves, and retained profits adjustments for the year ending May 31, 2020.

Question

Prepare the following information in a form suitable for publication for Badu Trading Ltd’s financial statements for the year ended 31 May 2020.

c) Statement of changes in equity. (6 marks)

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2020

FR – Nov 2020 – L2 – Q1a – Consolidated Statement of Profit or Loss

Prepare the consolidated statement of profit or loss and other comprehensive income for Kingdom Ltd Group for the year ending 31 December 2019.

Question

Statement of profit or loss and other comprehensive income for the year ended 31 December 2019 of Kingdom Ltd and Paradise Ltd.

Description	Kingdom Ltd (GH¢000)	Paradise Ltd (GH¢000)
Revenue	125,200	60,000
Cost of sales	(91,600)	(48,000)
Gross profit	33,600	12,000
Distribution costs	(4,000)	(2,400)
Administrative expenses	(7,000)	(3,600)
Finance costs	(400)	0
Profit before tax	22,200	6,000
Income tax expenses	(6,200)	(2,000)
Profit for the year	16,000	4,000
Other comprehensive income: Gain on revaluation of property	3,000	0
Total comprehensive income	19,000	4,000

Statement of financial position as at 31 December 2019

Description	Kingdom Ltd (GH¢000)	Paradise Ltd (GH¢000)
Assets
Non-current assets:
Property, plant, and equipment (PPE)	37,400	27,800
10% loan note	2,000	0
Total non-current assets	39,400	27,800
Current assets:
Inventory	8,600	2,400
Trade receivables	9,400	5,000
Bank	0	600
Total current assets	18,000	8,000
Total assets	57,400	35,800

vi) Kingdom Ltd on December 2019, accepted a GH¢1 million 10% loan note from Paradise Ltd.

vii) At 31 December 2019, the goodwill that arose on acquisition was impaired by GH¢1 million. Kingdom Ltd has a policy of treating goodwill impairment as part of administrative expense.

viii) It is the policy of Kingdom Ltd group to value the non-controlling interest at fair value. For this purpose, Paradise Ltd’s share price was trading at GH¢2.50 each at the acquisition date.

ix) Assume that all items of income and expenditure accrue evenly throughout the year except where indicated otherwise.

Required:
a) Prepare the consolidated statement of profit or loss and other comprehensive income for Kingdom Ltd group for the year ended 31 December 2019. (10 marks)

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: NOV 2020

FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

Question

Required:
In accordance with IFRS 16: Leases, show the accounting treatment of the above transaction.

Answer

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Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2021

FR – May 2021 – L2 – Q3 – Statement of Profit or Loss

Prepare financial statements based on the provided trial balance.

Question

The following trial balance relates to Koli Ltd for the year ended 31 December, 2020.

Description	Debit (GH¢’000)	Credit (GH¢’000)
Sales	128,000
Purchases	75,000
Distribution expenses	8,000
Administrative expenses (Note ii)	22,000
License (Note iii)	5,000
Inventories at 31 December 2019	26,200
Finance costs on a long-term loan	3,000
Income tax (Note iv)		200
Deferred tax (Note iv)		6,000
Dividend paid on equity shares		2,000
Property, Plant and Equipment (PPE)	57,000
Provision for depreciation on PPE		10,790
Trade receivables	52,000
Bank balances	33,790
Trade payables		12,000
Provision for legal costs (Note ii)	10,000
Long-term loan		40,000
Stated capital		50,000
Retained earnings as at 31 December 2019		27,000
Total	283,990	283,990

Additional information:

i) The carrying value of inventories on 31 December 2020 was GH¢23 million.

iii) On 1 January, 2020, Koli Ltd paid GH¢5 million for a ten-year export license.

v) The details of property, plant and equipment are as follows:

Component of PPE	Cost (GH¢’000)	Accumulated Depreciation (GH¢’000)	Carrying Amount (GH¢’000)
Land	12,000	0	12,000
Buildings	18,000	3,240	14,760
Plant and Equipment	27,000	7,550	19,450
Total	57,000	10,790	46,210

Estimate of useful economic life (at the date of purchase) of PPE components:

Land: nil (infinite life)
Building: 50 years
Plant and Equipment: 4 years

Depreciation of property, plant and equipment is allocated as follows:

80% to cost of sales
10% to distribution expenses
10% to administrative expenses

(Total: 20 marks)

Answer

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Level: Level 2