Great National Limited (GNL), is a multinational company with diverse product ranges and operating in many geographical markets. GNL is finalizing its financial statements for the year ended 30 November 2010 and seeks your advice on the matters listed below: 

 

1. (a) GNL has a piece of property located in a foreign country, which was acquired at a cost of US$2 million on 30 November 2009 when the exchange rate was US$1 = Shs 2,000. At 30 November 2010, the property was revalued to US$2.5 million. The exchange rate at 30 November 2010 was US$1 = Shs 2,200. The property was carried at its value as at 30 November 2009. The company policy is to revalue property, plant and equipment whenever material differences arise between book and fair value. Depreciation on the property can be assumed to be immaterial. 
2. (b) GNL manufactures equipment for the retail industry. The inventory is currently valued at cost. There is market for the partially completed product at each stage of production. The cost structure and expected selling structure of the equipment is as follows: 

 

                                                                                                COST PER UNIT                    SELLING PRICE PER UNIT

Shs million                               Shs  million

 

Production process 1^st stage                                                    2.2                                             2.5

Conversion cost to finished product                                        1.1

  Finished product                                                                        3.3                                            3.8

 

 

The selling costs are Shs 200,000 per unit of the finished product and GNL has 100,000 units at the first stage of production and 200,000 units of the finished product at 30 November 2010. Shortly before the year end, a competitor released a new model onto the market which caused the equipment manufactured by GNL to be less attractive to customers. The result was a reduction in the selling price to Shs 3.2 million of the finished product and Shs 2.05million for the first stage product. (5 marks) 

 

(c) The directors of GNL announced on 1 December 2009 that a bonus of Shs 4 billion would be paid to the employees of GNL if they achieved a certain production level by 30 November 2010. 

The bonus is to be paid partly in cash and partly in share options. Half of the bonus will be paid in cash on 31 May 2011 whether or not the employees are still working for GNL. The other half will be given in share options on the same date, provided that the employees are still in service on 31 May 2011. The exercise price and the number of options will be fixed by management on 31 May 2011. The targeted production was met and management expect 10% of employees to leave between 30 November 2010 and 31 May 2011. (5 marks) 

 

(d) GNL has decided to close one of its overseas branches. A board meeting was held on 31 October 2010 when a detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. The information was communicated to the people affected by this decision on 15 November 2010. The operations of the branch are to be moved to another country from December 2010 but the operating lease on the present buildings of the branch is non-cancellable and runs for another two years, until 30 November 2012. The annual rental of the buildings is Shs 2 billion payable in arrears on 30 November and the lessor has offered to take a single payment of Shs 3.1 billion on 30 November 2011 to settle the outstanding amount owing and terminate the lease on that date. GNL has additionally obtained permission to sublet the building at a rental of Shs 1 billion per year, payable in advance on 1 December. A discount rate of 18% should be used where necessary. (5 marks) 

1.  
2. (e) GNL owns a building which is currently accounted for using the cost model in IAS 16: Property, plant and equipment. The carrying amount of the property was Shs 10 billion on 30 November 2009. The building had a remaining life of 20 years on 30 November 2009, and GNL uses straight line depreciation. GNL sold the building to a third party on 1 December 2009 and leased it back under a 20-year finance lease agreement. The sale price and fair value are Shs 12 billion which is the present value of the minimum lease payments. The agreement transfers the title of the building to GNL at the end of the lease at no cost. The rental is Shs 2 billion per annum in advance commencing 1 December 2009. The implicit interest rate in the lease is 18%. (5 marks) 
3.  
4. (f) GNL operates a defined benefit pension plan that provides a pension of 1.2% of the final salary for each year of service, subject to a minimum of four years’ service. On 1 December 2009, GNL improved the pension entitlement so that employees receive 1.4% of their final salary for each year of service. This improvement applied to all prior years’ service of the employees. As a result, the present value of the defined benefit obligation on 1 December 2009 increased by Shs, 5 billion as follows: 

 

Shs billion

Employees with more than four years                                                              3

Employees with less than four years’ service                                                    2

 (average service of two years)                                                                             5

 

GNL had not accounted for the improvement in the pension plan.

 

Required: 

Discuss how the above items (a) to (f) should be dealt with in the financial statements of GNL for the year ended 30 November 2010. Your answer should include appropriate and suitable computations.

 

QUESTION 2

 

Munich Printers Ltd (MPL) is a company that offers printing services to various 

customers in Uganda. MPL has been operating the printing business for a period 

over 30 years and currently MPL operates two heavy duty printing machines that 

were acquired on 1 April, 2016 at a total cost Shs 540 million with an estimated 

useful life of 20 years with no residual value. 

During the year ended 31 March 2021, MPL’s business was negatively affected 

when the country went into Covid -19 total lock-down that put MPL’s printing 

business to a halt. A printing test done on the printing machines of MPL on 31 

March, 2021 established that the two printing machines that were acquired on 1 

April, 2016 had rusted and were no longer performing as expected and their

remaining useful lives were adjusted to 10 years. 

Information relating to an impairment test done on the printing machines on 31 

March, 2021 is as follows: 

MACHINE                                                    COST                    FAIR VALUE                 VALUE IN USE 

Shs 000                  Shs 000                        Shs 000

 

MACHINE 1                                             240,000                   165,000                       154,000

MACHINE2                                              300,000                   230,000                      228,000

TOTAL                                                       540,000                   395,000                       382,000

 

The market conditions that existed on 31 March, 2021 showed that the cost of disposal for machine 1 and 2 were Shs 6 million and Shs 4.5 million respectively. 

During the year ended 31 March 2022, the lock down was lifted and the machine performance started to improve as they were being used. An impairment test on 31 March, 2022, revealed that the value in use for the printing machines were Shs 165 million and 203 million for machine 1 and 2 respectively, however, their fair values less cost of disposal could not be established as there was no active market for such printers.

MPL depreciates its property, plant and equipment on a straight line basis over

the useful life of the asset with no residual value.

Management of MPL has approached you for guidance on how the two printing

machines should be accounted for in MPL financial statements.

 

Required:

In accordance with IAS 16: Property, Plant and Equipment and IAS 36:

Impairment of Assets explain to management of MPL,

(a) The circumstances that must exist for reversal of an impairment loss.

(b) How the printing machines will be treated in the financial statements for the year ended 31 March, 2021 and 2022 giving financial statement extracts.

be accounted for in MPL financial statements. 

 

 

QUESTION 3

 

Question 3: Green Miner Ltd.

IAS 37 provisions, contingent liabilities and contingent assets was issued in 1988. Prior to its publication, there was no International Accounting Standard that dealt with the general subject of accounting for provisions. Green Miner ltd is involved in extracting minerals in a number of different countries. The process typically involves some contamination of the site from which the minerals are extracted. Green Miner ltd makes good this contamination only where legally required to do so by legislation passed in the relevant country. The company has been extracting minerals in Copper land since January 2007 and expects its site to produce output until 31st Dec 2015. On 31st Dec 2011 it came to the attention of the directors of Green Miners ltd that the government of Copper land was virtually certain to pass legislation requiring the making good of mineral extraction sites. The legislation was dully passed on 15th March 2012. The directors of Green Miners estimate that the cost of making good the site in Copper land will be $2 million. This estimate is of the actual cash expenditure that will be incurred on 31st Dec 2012. 

1. a) Define the following terms according to IAS 37; 
2. i) Contingent liabilities. 
3. ii) Contingent Assets. 
4. iii) Provisions. 
5. iv) A liability. 
6. b) Describe the criteria that need to be satisfied before a provision is recognized in the financial statement. 
7. c) Explain why there was need for an accounting standard dealing with provisions. 
8. d) Explain why Green miners ltd should recognize a provision for the estimated costs of making good the site.