Question 1

(a) The management of Jewelry Enterprises Limited (JEL),dealers in jewelryhave recently experienced tremendous increase in the demand for jewelry, and are therefore considering expanding their distribution network. In their recent meeting,they resolved to acquire a bank loan to finance the expansion whereupon the bank has requested them to submit their financial statements for the year ended 30 June, 2018 to assess JEL's eligibility for the loan facility.

The management have availed you the following list of balances extracted from the ledger accounts of JEL for the year ended 30 June, 2018:

Ledger account:

Motor expenses

Distribution costs

Rent & rates paid

Ordinary share capital Shs 100,000 per share Share premium

Retained earnings

Directors fees paid

Sales

Bank overdraft interest charges Trade & other receivables Salaries & wages

Postage &mailing expenses Motor vehicles at cost Trade payables

Cash at bank

Cash in hand

Fixtures & fittings at cost

Accumulated depreciation 1 July, 2017: Furniture & fittings

Motor vehicles

Buildings

Inventory on 1 July, 2017

Purchases

Land &buildings at cost

10,500 44,000 25,000 25,000

187,000 193,000

Additional information:

1. On 1January, 2018 JEL imported jewelry from a supplier in Turkey worth US dollars (USD) 50,000 on credit. At 30 June, 2018, 50% of this jewelry was unsold and unpaid for. The unsold amount was not included in the balances referred to under note7 below whereas the unpaid amount was not included in the purchasesbalance listed above.

TheUSDexchange rates to the shilling during the year were as follows:

Date

Rate (Shs) 3,450 3,650 3,745

1. During the year ended 30 June, 2018, two members of staff who had been terminated due to gross misconduct sued JEL on grounds of unlawful termination and demanded compensation totaling to Shs 50 million. The staff had each obtained and signed JEL operational guidelines that defined and spelt out the consequences of gross misconduct. The company lawyers have advised management that there is no possibility of loss of the law suit.
2. During the annual general meeting for the year ended 30 June, 2018, the directors proposeda 10% dividend on ordinary shares.
3. JEL pays annual rent and rates in advance on a calendar year basis. The amount of rent and rates paid is for the calendar year ending 31 December, 2018.There has been no change in the rent and rates payable for the last three years.Salaries amounting to Shs 10 million were outstanding by 30 June, 2018 and were not included in the balances provided above.
4. JEL depreciates their non-current assets on straight-line basis, per annum, as follows:

Asset

Furniture & fittings Motorvehicles Buildings

Rate (%) 12.5 20 5

6. Included in the balance for land and buildingsis freehold land that cost Shs 130.5 million on which the buildings sit.At the beginning of the year, a revaluation of buildings was done and they were established to have a value of Shs 30 million. There was no change in the expected useful life of the buildings.No adjustment of the revaluation was made in the books of account.

7. On 30 June, 2018jewelry worth Shs 23.5 millionwhose realisable value was Shs 27 million was still in stock.

Required:

As the consultant contracted by JEL, and in accordance with IAS 1: Presentation of Financial Statements, prepare for JEL for the year ended 30 June, 2018 a statement of:

1. (i)profit or loss and other comprehensive income. (15 marks)
2. (ii)financial position as at 30 June. (15 marks)

(b) In a business meeting with revenue officials, the directors of JEL were informed that JEL's tax compliance and the computations with regard to the current tax, deferred tax and tax charge werebelow expectation.

Required:

Explain to the directors of JEL, the following concepts in regard to IAS 12: Income Taxes:

1. (i)Accounting profits and taxable profits.
2. (ii)Current tax and deferred tax.
3. (iii)Timing differences and temporary differences.
4. (iv)Taxable and deductible temporary differences.
5. (v)Deferred tax assets and deferred tax liabilities.

SECTION B

Attempt three of the four questions in this section

Question 2

Go-Happy Investments (GHI) operates a chain of 18 hotels in Uganda. GHI issued its consolidated financial statements for the year ended 31 March, 2018 recently. The directors of GHI are due for retirement and resolved to dispose of the hotel business. This would enable them concentrate on their personal businesses. To this effect, the management of Jmex Hotel Ltd (JHL),a foreign five-star hotel with its headquarters in Europe,has expressed interestto take over all the 18 hotels.

You have been contracted by the management of JHLto offer consultancy services with regard to the performance of GHI hotels. The directors of JHLare concerned as to why the management of GHI could resolve to dispose of the chain of 18 hotels that are seemingly doing well.

You obtained the following information from the management of GHI in relation to the hotel business for the year ended 31 March, 2018 with comparatives for 2017.

2018 Shs'million' Revenue 56,475

2017 Shs'million' 43,920 (41,220) (1,044) (360) (468) 828 9,396 (288) 9,936 20,700 3,960 1,656 468 432 5,400 9,936 5,796 9,828 1,296

Cost of sales

Operating costs

Finance costs

Income tax expense Profit for the period Retained earnings at start Dividends paid

Retained earnings at close Property, plant & equipment Intangible assets Inventories

Trade & other receivables Cash

Share capital

Retained earnings

16% bank loans

Trade & other payables Hotel tax

(52,965) (945) (450) (630) 1,485 12,420 (360) 13,545 26,100 4,500 2,115 540 2,070 6,750 13,545 7,515 13,365 900

You established that six of the GHI hotels had been acquired during the year2017.

The key performance indicators in the hotel industry inUganda for the years 2017 and 2018 are as follows:

Debt: equity ratio 1.20

Dividend cover (times) 2.0

Dividend pay-out ratio (%) 72 Current ratio 1.0 Return on assets (%) 16

Required:

1. (a)Prepare report, to the directors of JHL, analysing the position and performance of the GHI hotels based on theinformation provided. The report should be based on comparisons with the key industry ratios.
2. (15marks)
3. (b)Explain the limitations of the use of industry comparatives in financial analysis.

Question 3

Clasibuk Uganda Ltd (CUL) deals in stationery and printing services. On 1 January, 2016CUL acquired a copyright for Shs 70million to print and sell Mbook textbooks. Analysis done on the same date about the consumer habits and trends, provided evidence that the copyrighted material would generate net cash flows for only 20 years despite the copyright's legal life of 25years. On 31 December, 2017, the management of CUL tested the copyright for impairment and its fair value was Shs 55 million.

Required:

1. (a)Explain the term 'intangible asset' in accordance with IAS 38:Intangible Assets.
2. (1 mark)
3. (b)Discuss the criteria for recognition of intangible assets in the financial statements of CUL and indicate the basis of subsequent measurement in accordance with IAS 38.
4. (12marks)
5. (c)Explain how the above transaction should be recorded in the books of CUL for the year ended 31 December, 2017.

Question 4

Sukari Manufacturing Ltd (SML) was incorporated in Uganda to manufacture and sell sugar and related products. In a bid to control the source of raw materials, SML acquired 30,000 shares in Kajjo Ltd (KL), a company that deals in growing sugarcane on 1 January, 2017. The retained earnings of Kajjo Ltd at the date of acquisition were Shs 200 million.

The following are draft statementsof financial position of SML and KL as at 31 December, 2017:

Assets:

Non-current assets

Current assets

Total assets

Equity & liabilities:

Share capitalShs 20,000 per share Reserves

Liabilities:

Non-current liabilities

Current liabilities

Total equity & liabilities

Additional information:

SML Shs 'million' 42,820 10,750 53,570

1,000 46,000

4,720

1,850 53,570

KL Shs 'million' 2,290 770 3,060

800 330

1,700 230 3,060

1. The purchase consideration consisted of a cash payment Shs 1.5billion made immediately on the date of acquisition, a share exchange of 1 for every 2 shares held in KL, and a deferred consideration of Shs 330 million payable on 31 December, 2017. None of the purchase consideration had been recorded in the books of SML.
2. The weighted average cost of capital within the sugar industry is 10%.The fair values of SML's and KL's shares on the date of acquisition were Shs 25,000 and Shs 26,000 respectively.

Required:

1. (a)Discuss the treatment of the additional information in the books of SML.
2. (8 marks)
3. (b)Compute the following as they would appear in the consolidated statement of financialposition of SML for the year ended 31 December, 2017.
4. (i)Goodwill.
5. (ii)Group reserves.
6. (iii)Non-controlling interest at year end.
7. (9 marks)

(a) Explain the circumstances that must exist for an investor to have control over an investee as specified in IFRS 10: ConsolidatedFinancial Statements.

Question 5

The Management of East Seeds Limited (ESL) is disappointed by the profit reported for the year ended 30 June, 2018. The Chief Finance Officer (CFO) believes that revision of asset depreciation, inventory valuation and borrowing cost will improve the reported profit for the year. He has provided you with the following information:

1. A major item of seed processing plant that cost Shs 72 million to purchase and install on 1 July, 2015, is being depreciated on a straight-line basis over a5-year period with no residual value. However, it is believed by the production manager that it may last for an additional 3 years.
2. Based on the above information the CFO has indicated that as at 30 June, 2018 the accumulated depreciation of the plant would be Shs 43.2 million (Shs 72 million 5 years x 3).In the financial statements for the year ended 30 June, 2017 the accumulated depreciation was Shs 28.8 million (Shs 72 million 5 years x 2). This Implies that adopting the 8 years, the company would avoid a depreciation charge for the current year and instead credit Shs 16.2 million (Shs 43.2 million - Shs 27 million) to the income statement in the current year to improve the reported profit.
3. The company has been valuing inventory using the last in first out (LIFO) basis. The value of inventory as at 30 June,2018 and 30 June, 2017 (on the LIFO basis) was Shs 45.8 million and Shs 46.1 million respectively. However, on the FIFO basis it would be valued at Shs 48.2 million and at

Shs 49.7 million respectively.By adopting FIFO this would improve the

profit for the year ended 30 June, 2018.

3. During the year ended 30 June, 2017, the company acquired a loan to

fund the construction of a seed research center.Currently the borrowing costs are being expensed. The CFO that suggested capitalising these borrowing costs while the research centre is under construction would result in the fair recognition of property, plant & equipment.The borrowing cost so far incurred in the year ended 30 June, 2018 amount to Shs 8 million.

Required:

1. (a)Comment on the validity of the CFO's suggestions' quantifyingthe effect of each of the suggestions on the financial statements if implemented under relevant International Financial Reporting Standards (IFRS).
2. (15marks)
3. (b)Explain circumstances under whichretrospective application of a change in accounting policy may be exempted.
4. (5 marks)