FINANCIAL REPORTING AND ANALYSIS REVISION KIT ( KASNEB PAST PAPERS WITH ANSWERS)

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TOPIC 1

 ACCOUNTING FOR ASSETS AND LIABILITIES

 

QUESTION 1

April 2024 Question One A and D

a) The objective of International Accounting Standard (IAS) 2 – Inventories, is to prescribe the accounting treatment for inventories for various types of business organisations.

 

Required:

Summarise the key requirements of IAS 2 for manufacturing entity under the following headings:

(i) Scope of the term “inventories”.       (2 marks)

(ii) Measurement of inventories.         (3 marks)

(iii) Disclosure requirements.        (3 marks)

 

ANSWER

(i)  Scope of the term inventories

Inventory is an asset heed for sale in the normal course of the business. This includes raw materials, work in progress or finished goods. Inventory also includes material and supplies that are consumed in production.

(ii) Measurement of inventories

Inventory should be stated based on the lower of cost and the net realized value (NRV). The cost shall comprise

1. Cost of purchase – This comprise purchase price, import duties and other non refundable taxes, transport cost handling and other direct costs.
2. Cost of conversion – This comprise the direct labour cost, variable production overheads and fixed production overhead.
3. Administrative cost, selling cost, abnormal losses shortage cost etc.

(iii) Disclosure requirements

1. Method adopted in determining the cost
2. The carrying amount of inventories suitably classified into raw materials WIP and finished goods
3. Inventory that was valued at net realizable value
4. Circumstances leading to written down inventories to net realizable value
5. Inventories pledged as securities
6. Accounting policy of the inventory

(d) With reference to International Financial Reporting Standard (IFRS) 9 – Financial instruments, explain the requirement for derecognition of financial instruments. (3 marks)

 

ANSWER

Requirement for derecognition of financial instruments as per IFRS 9

De-recognition is the removal of a previously recognized financial instrument from entity’s financial statement de-recognition shall happen when:

• When the entity contractual rights or the assets cash flows have expired or
• The asset have been transferred to a third party along with the risks of ownership (when sold)

 

QUESTION 2

April 2024 Question Two

(a) The following trial balance was extracted from the books of Kaleb Ltd. as at 31 March 2024:

	Sh.“000”	Sh.“000”
Ordinary share capital		475,00
Share premium		95,000
Retained profit (1 April 2023)		184,600
8% loan note		120,000
Revenue		1,783,800
Cost of sales	1,300,500
Distribution costs	209,900
Administrative costs	258,600
Inventory (31 March 2024)	308,000
Trade receivables	382,400
Trade payables		388,300
Bank balance		27,500
Deferred tax	33,000
Property at cost (Land Sh.87 million)	457,000
Plant and equipment at cost	360,000
Motor vehicles at cost	82,000
Fixtures and fittings at cost	64,000
Accumulated depreciation (1 April 2023):
– Building		162,800
– Plant and equipment		119,400
– Motor vehicles		41,000
– Fixtures and fittings		25,600
Interest paid	9,600
Suspense account	________	42,000
	3,465,000	3,465,000

 

Additional information:            

1. During the year ended 31 March 2024, the company sold of an item of plant with a carrying amount of Sh.46,200,000 for cash proceeds of Sh.42,000,000. The disposal proceeds were credited to the suspense account.

Plant and equipment is depreciated at the rate of 12.5% per annum on reducing balance basis. Full year depreciation is provided in the year of asset purchase and none in the year of disposal. Depreciation and any gain or loss on disposal of plant and equipment should be classified under the cost of sales.

2. Depreciation on other non-current assets is provided and allocated as follows:

 

Asset	Rate per annum (%)	Basis	Allocation
Building	2	Straight line	Administration
Motor vehicles	25	Straight line	Distribution
Fixtures and fittings	10	Straight line	Administration

 

3. The 8% loan note was issued on 1 April 2023 and will be redeemable in three years’ time at a substantial premium which gives an effective interest rate of 10% per annum.
4. Tax provision for the year to 31 March 2024 was determined to be a tax credit estimated at Sh.15,700,000. In addition, at 31 March 2024, the tax bases of assets and liabilities exceeded their carrying amounts by Sh.121,000,000.

The income tax rate applicable to Kaleb Ltd. is 30%.

 

Required:

(i)  Property, plant and equipment movement schedule for the year ended 31 March 2024.  (4 marks)

(ii) Statement of profit or loss for the year ended 31 March 2024.     (6 marks)

 

ANSWER

(i) Property, plant and equipment movement schedule for the year ended 31 March 2024

PPE movement schedule For the year ended 31 March 2024
	Property Sh 000	Plant Machinery	Motor vehicle	Furniture  fittings
Cost as per 1 April 2023	457,000	360,000	82,000	64,000
Less: Accumulated depreciation brought forward	(162,800)	(119,400)	(41,000)	(25,600)
Carrying amount at 1 April 2023 Less: disposal carrying amount	294,200 –	240,600 (46,200)	41,000 –	38,400 –
Less: Depreciation for the year	294,200 (7,400)	194,400 (24,300)	41,000 (21,000)	38,400 (6,400)
Carrying amount at 31 March 2024	286,800	170,100	20,000	32,000

 

(ii) Statement of profit or loss for the year ended 31 March 2024

 

Kalen Ltd Statement Of Profit Or Loss For The Year Ended 31 March 2024
	Sh 000
Revenue	1,783,800
Cost of sales	(1,329,000)
Gross profit	454,800
Expenses
Administrative expenses (258,600 + 7,400 + 6,400)	(272,400)
Distribution expenses (209,900 + 21,000)	(230,900)
Finance cost (W3)	(120,000)
Profit before tax	(60,500)
Tax (W4)	1,900
Profit after tax	(41,500)

 

Workings

W1

Disposal loss of plant item	Sh 000
Disposal proceed	42,000
Carrying amount	(46,200)
Disposal loss —[to cost of sale]	4,200

 

W2

Depreciation of assets

Plant & equipment = 12.5% [360,000 – 119,400 – 462,000] = 24,300

Building = 2% × 370,000 = 7,400             Admin expenses

Motor vehicles = 25% × 82,000 = 21,000              Distribution expenses

Furnitures & fittings = 10% × 64,000 = 6,400              Admin expenses

 

W3

8% of loan note

Balance as at 1 April 2023	120,000
Interest expense 10% × 120,000                   (to P&L)	12,000
Less: Coupon interest paid 8% × 120,000	(9,600)
Balance as at 31 March 2024	122,400

 

W4

Deffered tax asset

 Increase in deferred tax asset

Balance as at 1 April 2023	33,000
Balance as at 31 March 2024	36,300
Increased amount ( Tax income)	3,300

 

Tax expense

For the year [tax credit]	15,700
Deffered tax changes	3,300
	19,000

 

(b) On 30 June 2022, Fora Ltd. had a credit balance on its deferred tax account of Sh.1,340,600 all in respect of differences between depreciation and capital allowances.

During the year ended 30 June 2023, the following transactions took place:

1. Sh.45 million was charged against profit in respect of depreciation. The tax computation showed capital allowances of Sh.50 million.
2. Interest receivable of Sh.50,000 was reflected in profits for the period. However, only Sh.45,000 of interest was actually received during the year. Interest is not taxed until received.
3. Interest payable of Sh.32,000 was treated as an expense for the period. However, only Sh.28,000 of interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is paid.
4. During the year, Fora Ltd. incurred development costs of Sh.500,600 which it has capitalised. Development costs are an allowable expense for tax purposes in the period in which they are paid.
5. Land and buildings with a net book value of Sh.4,900,500 were revalued to Sh.6 million.
6. The tax rate is 30%.
7. Fora Ltd. has a right to offset deferred tax asset and deferred tax liabilities.

 

Required:

Determine the deferred tax liability on 30 June 2023.                                         (10 marks)

(Total: 20 marks)

   

ANSWER

(Income Tax IAS 12

Income statement items

	Taxable items	Accounting per item	Temporary differences
Depreciation & capital allowance	50,000,000	45,000,000	5,000,000
Interest income	(45,000)	(50,000)	5,000
Interest expenses	28,000	32,000	(4,000)
			5,001,000

 

NB: Expenses are recognized as positive and income as negative

    Statement of financial positions items

	Carrying amount	Tax base	Temporary differences
Development cost	500,600	0	500,600
Interest income	6,000,000	4,900,500	1,099,500
			1,600,100

 

Deffered tax liability as 30 June 2023

 Deffered tax account

		Balance b/d	1,340,600
		Revaluation of land
Balance c/d	1,980,330	30% × 1,099,500	329,850
	________	To profit or loss a/c	309,880
	1,980,330		1,980,330

 

 

QUESTION 3

December 2023 Question One A

With reference to International Financial Reporting Standard (IFRS) 6 – Exploration for and Evaluation of Mineral Resources:

(i)  State the underlying principle for measurement of exploration and evaluation assets.       (2 marks)

(ii) Describe THREE circumstances that indicate that an entity should test exploration and evaluation assets for impairment.         (3 marks)

 

ANSWER

a) i)Measurement principle for exploration and evaluation

• Exploration and evaluation asset shall be measured at cost

ii) Circumstances indicating that an entity should test exploration and evaluation asset for impairment

• Change in technology
• Net asset of the company is higher than its market capitalization
• Sufficient data exist to indicate that, although a development in the specific area likely to exceed the carrying amount of exploration and evaluation is unlikely to be recovered in full from successful development or by sale.
• Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned
• Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue in such activities in the specific areas