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: Shs '000'

Motor expenses 15,000

Distribution costs 44,000

Rent & rates paid 48,000

Ordinary share capital Shs 100,000 per share 280,000

Share premium 14,000

Retained earnings 12,500

Directors fees paid 10,000

Sales 498,000

Bank overdraft interest charges 9,000

Trade & other receivables 115,000

Salaries & wages 75,000

Postage &mailing expenses 5,000

Motor vehicles at cost 110,000

Trade payables 45,000

Cash at bank 35,000

Cash in hand 16,000

Fixtures & fittings at cost 42,000

Accumulated depreciation 1 July, 2017:

Furniture & fittings 10,500

Motor vehicles 44,000

Buildings 25,000

Inventory on 1 July, 2017 25,000

Purchases 187,000

Land &buildings at cost 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)

1 July, 2017 3,450

1 January, 2018 3,650

30 June, 2018 3,745

2. 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.

3. During the annual general meeting for the year ended 30 June, 2018, the

directors proposeda 10% dividend on ordinary shares.

4. 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.

5. JEL depreciates their non-current assets on straight-line basis, per annum,

as follows:

Asset Rate (%)

Furniture & fittings 12.5

Motorvehicles 20

Buildings 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:

(i) profit or loss and other comprehensive income. (15 marks)

(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:

(i) Accounting profits and taxable profits. (2 marks)

(ii) Current tax and deferred tax. (2 marks)

(iii) Timing differences and temporary differences. (2 marks)

(iv) Taxable and deductible temporary differences. (2 marks)

(v) Deferred tax assets and deferred tax liabilities. (2 marks)

(Total 40 marks)

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 2017

Shs'million' Shs'million'

Revenue 56,475 43,920

Cost of sales (52,965) (41,220)

Operating costs (945) (1,044)

Finance costs (450) (360)

Income tax expense (630) (468)

Profit for the period 1,485 828

Retained earnings at start 12,420 9,396

Dividends paid (360) (288)

Retained earnings at close 13,545 9,936

Property, plant & equipment 26,100 20,700

Intangible assets 4,500 3,960

Inventories 2,115 1,656

Trade & other receivables 540 468

Cash 2,070 432

Share capital 6,750 5,400

Retained earnings 13,545 9,936

16% bank loans 7,515 5,796

Trade & other payables 13,365 9,828

Hotel tax 900 1,296

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:

(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.

(15marks)

(b) Explain the limitations of the use of industry comparatives in financial

analysis.

(5 marks)

(Total 20 marks)

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:

(a) Explain the term 'intangible asset' in accordance with IAS 38:Intangible

Assets.

(1 mark)

(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.

(12marks)

(c) Explain how the above transaction should be recorded in the books of CUL

for the year ended 31 December, 2017.

(7 marks)

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:

SML KL

Assets: Shs 'million' Shs 'million'

Non-current assets 42,820 2,290

Current assets 10,750 770

Total assets 53,570 3,060

Equity & liabilities:

Share capitalShs 20,000 per share 1,000 800

Reserves 46,000 330

Liabilities:

Non-current liabilities 4,720 1,700

Current liabilities 1,850 230

Total equity & liabilities 53,570 3,060

Additional information:

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:

(a) Discuss the treatment of the additional information in the books of

SML.

(8 marks)

(b) Compute the following as they would appear in the consolidated

statement of financialposition of SML for the year ended 31

December, 2017.

(i) Goodwill.

(ii) Group reserves.

(iii) Non-controlling interest at year end.

(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.

(3 marks)

(Total 20 marks)

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.

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.

2. 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:

(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).

(15marks)

(b) Explain circumstances under whichretrospective application of a

change in accounting policy may be exempted.

(5 marks)