Question 1

Bugie Uganda Limited (BUL) manufactures and supplies paint. However, there is stiff competition in the paint industry. To this effect, the management of BUL continuously develops strategies to help the company remain competitive in the market. One of the strategies is the development of a special system that helps them develop unique colours.

The following trial balance relates to BUL for the year ended 30 April, 2018.

Note

Sales revenue

Cost of sales

Leasehold property

Lease obligations 7

Computers (cost 1 May, 2016) 3 Depreciation on 30 April, 2018 1 Buildings (cost 1 May, 2015) Depreciation 30 April, 2018 1 Equipment (cost 1 may, 2015) Depreciation 30 April, 2018 1 Furniture (cost 1 May, 2015) 5 Depreciation 30 April, 2018 1 Share capital (4,200 shares) Development expenditure 4 Debtors & creditors 6 Administration expenses (including

loan interest Shs 40 million) Selling & distribution Inventory 30 April, 2018 Cash & bank

Retained earnings 1 May, 2017 10% long-term loan

Dr. Shs '000'

1,890,011 736,009

Cr. Shs '000' 3,432,500

736,009

736,400

320,000 430,000 432,700

5,797,620

414,200

93,170 125,091 400,000

5,797,620

46,000

46,000

620,000

37,200

450,000

67,500

86,500

25,950

420,000 50,000

The following notes were also provided:

1 BUL's policy is to depreciate its non-current assets on a straight line basis with full year depreciation in the year of acquisition and none in the year of disposal using the following annual rates:

Asset Computers Buildings Equipment Furniture

Rate (%) 50

2

5 10

Following a review of the depreciation method, it was found that there was a significant change in the expected patterns of economic benefits from each category of non-current assets. Management therefore, agreed to change the depreciation rates with effect from 1 may, 2017 as follows:

Asset Computers Buildings Equipment Furniture

Rate (%) 25 4 10 12.5

1. 2During the year ended 30 April, 2018 BUL was contracted to supply certain type of paint to paint the outside walls of a hotel that was being constructed. The paint was eroded by rain a few months after the painting. Legal proceedings were instituted seeking damages from the company but the company denies liability. By the date of authorisation of its financial statements for the year ended 30 April, 2018 the lawyers advised that owing to the developments in the case, it was probable that BUL would be found liable to pay Shs 398 million in penalties.
2. 3Included in the balance for computers is a specialised piece of computer that was purchased on 1 May, 2016 for Shs 6 million. The computer had been depreciated at 50% per annum on straight line basis. The estimated residual value is nil and had been fully depreciated by 30 April, 2018. Management agreed to sell this computer in the second-hand market for this type of computer. The market value of the computer is Shs 2 million. You are informed that management has opted to account for this computer using the fair value based on the observable market value and has advised you that the measure of the recoverable amount of the computer is its market value. Your review indicates that the computer's cash generating unit is not impaired and there is no intention to replace the computer.

1. 4BUL's risk management team is developing a new system to help in colour mixing. The total expenditure incurred as of 30 April, 2018 was Shs 50 million, of which Shs 40 million was incurred before 1 May, 2017. The company can demonstrate that on 1 May, 2017 the new system met the criteria for recognition as an intangible asset. The recoverable amount of the system is estimated to be Shs 25 million.
2. 5Included in furniture is a specialised piece of furniture that cost Shs 1.5 million. This piece of furniture was later found not compatible with the other furniture that is used for the same purpose. BUL intends to dispose it of and there exists two different active markets for this piece of furniture at different prices. BUL assessed its price in two markets on 30 April, 2018 as given below.

Price to be received Transaction costs Transport costs

Kiseku market Shs '000'

1,100 50 80

Ddembe market Shs '000'

1,000 35 80

Kiseku market has the greatest volume and level of activity for this piece of furniture and you are advised to measure this specialised piece of furniture at fair value.

6 BUL imported some specialised equipment from the United States of America (USA) on 31 January, 2018. The invoice value is USD 24,000 and is due for settlement in equal installments on 28 February, 31 March and 30 April, 2018.

The exchange rates on the respective dates were: Shs = USD 1

31 January, 2018 28 February, 2018 31 March, 2018 30 April, 2018

3,650 3,630 3,635 3,675

The above transaction is yet to be recorded in the books of BUL. You are also informed that the directors settled the supplier and this should be reflected as an unsecured interest free loan to BUL with no specific repayment date. The company does not prepare monthly management accounts but prepares annual financial statements for statutory audits.

7 The amounts given in the trial balance as lease obligation and assets held under lease of Shs 736,009,000 relate to a lease liability whose interest implicit in the lease was 6% per annum. BUL makes annual lease repayments of Shs 100 million in arrears. The asset is to be depreciated at 10% per annum on straight line basis with a zero residual value. The

lease was secured on 1 May, 2014 but no adjustments were effected as per the requirements of IAS 17 (Leases) and you are required to restate the correct amounts for the lease liability and net book value of the lease as at 30 April, 2018.

Required:

As the accountant of BUL and putting into consideration the information provided and in accordance with IAS 1: Presentation of Financial Statements, prepare for BUL for the year ended 30 April, 2018 a statement of:

(i) (ii)

Profit or loss and other comprehensive income. Financial position as at 30 April, 2018.

(16 marks)

SECTION B

Attempt three of the four questions in this section

Question 2

Chem Laboratories Ltd (CLL) manufactures laboratory consumables. The increase in the number of tertiary institutions offering science disciplines has led to increased demand for such consumables overtime as they are used for practical lessons.

The statement of financial position for CLL for the year ended 31 December is as follows:

Non-current assets:

Shs 'million'

35,744 34,560 70,304

35,890 106,194

Property plant equipment (cost) Depreciation (21,500)

2017

Shs Shs

'million' 'million' 87,000

2016 Shs

'million' 54,200 (18,456)

14,340 15,000 6,550

44,000

24,000

68,000

-

3,314

38,194

106,194

65,500 Investments 34,560 Total non-current assets 100,060

Current assets:

Inventory 12,670 Receivables 18,440

Bank 9,885

Total assets 40,995

Equity & liabilities

Equity

Ordinary share capital(nominal

price)

Reserves 28,550

141,055

72,550

44,000

Non-current liabilities:

10% debenture 40,000 Current liabilities

Trade payables 22,555

Interest accrued 4,000

Current tax expense 1,950

28,505 Total equity & liabilities 141,055

34,880 -

Additional information:

1. 1All the accrued tax for 2015 was fully paid in 2016 and that of 2016 was paid during 2017
2. 2Operating information is as follows:

2017 Shs 'million'

Revenue 65,650

Cost of sales Operating costs Opening inventory

2016 Shs 'million'

50,840 28,756 12,084

8,234 3 Opening reserves for 2016 were Shs 20 billion.

34,850 20,300 10,344

Required:

1. (i)Compute three profitability ratios and two efficiency ratios for each of the two years and analyse the current and future performance of CLL using the ratios computed.
2. (12 marks)
3. (ii)Advise the management of CLL on the benefits and limitations of using ratios in interpreting financial statements.
4. (8 marks) (Total 20 marks)

Question 3

Kanene Ltd and Katoto Ltd are listed on the securities exchange. They both deal in related products and services involving selling and repair of electronic equipment ranging from simple to complex. In a bid to realise one of its objectives of expansion, Kanene Ltd acquired 41,600 shares of Katoto Ltd on 1 January, 2017.

The consideration for the acquisition was agreed to be:

• A cash payment Shs 250 million payable on 1 January, 2017.
• A share exchange 1 share for every two held in Katoto Ltd.
• A deferred cash payment Shs 80 million payable on 1 January, 2018.
• Kanene Ltd's weighted average cost of capital is 25%.
• The statements of financial position of the two companies as at 31 December, 2017 were as follows.

Kanene Ltd Shs '000' 608,200 574,000 223,100 1,405,300 (218,400) 1,186,900 907,700 Reserves 279,200 1,186,900

Additional information:

(i) The draft statement of financial position of Katoto acquired was as follows:

Tangible non-current assets Investment in Katoto Ltd at cost Current assets

Katoto Ltd Shs '000' 520,250 - 210,950 731,200 (102,920) 628,280 520,000 108,280 628,280

Current liabilities

Net assets

Ordinary share capital Shs 10,000 per share

Tangible non-current assets

Current assets

Total net assets

Ordinary share capital Shs 10,000 per share Reserves

Shs '000' 474,750 123,450 598,200 520,000

78,200 598,200

Ltd when it was

The fair value placed on the tangible non-current assets of Katoto Ltd on 1

January, 2017 was Shs 490 million.

1. (ii)On 1 July, 2017 Kanene Ltd sold goods Shs 80 million to Katoto Ltd, 40%
2. of these goods were still in stock by 31 December, 2017. The goods had
3. been invoiced to Katoto Ltd at a cost plus markup of 20%.
4. (iii)On 1 January, 2017 Katoto Ltd sold machinery costing 31.5 million to Kanene Ltd for Shs 35 million and the balances of their retained earnings as at 31 December,2017 were after charging a depreciation of 10% and
5. the profit earned is included in reserves of Katoto Ltd.
6. Required:

a)Prepare computations of goodwill, group reserves, and non- controlling interest that will be required while preparing consolidated statement of Kanene group for the year ended 31 December, 2017. Show adjustments that have to be made tothe non-current assets

of the group. (16 marks)

b)Explain the circumstances under which a parent company may be exempted from preparing consolidated financial statements?

Question 4

1. (a)Central Garments Ltd (CGL), a large manufacturing company dealing in textiles, has had cash flow difficulties for the last two years and its project to develop software to help in the creation of surface ornamented fabrics has stalled twice. Recently the company revived this project but there is still doubt that it will be finalised on schedule. The management of CGL is puzzled on how it should record the expenditure already incurred of Shs 30 million on the software and has approached you for advice.
2. Required:
3. As a newly appointed accountant, advise management on how the above transaction should be treated explaining the conditions that must be considered for an intangible asset to be recognised and the conditions for capitalising development expenditure in respect to the software.
4. (8 marks)
5. (b)CGL acquired its current software on 1 January, 2013 and estimated it to last for six years before making major modifications or disposing it of. The software was acquired at a cost of 120 million. In December, 2015 it suffered an impairment loss that reduced its carrying amount by half but its useful life remained unchanged.
6. On 31 December, 2016 the software was re-measured and was found to have a recoverable amount of Shs 70 million.
7. On 31 December, 2017, management sold the software to avoid incurring losses in case of another future fall in value. The disposal price was equal to its carrying value. The company amortises all its intangible assets with a finite life on straight-line basis. The accountant did not include any adjustment for this asset.
8. The statement of changes in equity of CGL for the year ended 31 December, 2017 is a follows:

Balance 1 January Issue of shares Profit for the year Bal on 31 December

Ordinary Share capital

Shs '000' 450,500 100,000

- 550,500

Share premium

Shs '000' 90,100 24,000 - 114,100

Revenue reserve

Shs '000' 388,000 - - 388,000

Revaluati- on reserve

Shs '000' 180,000 - 120,000 300,000

Total

Shs '000' 1,108,600 124,000 120,000 1,352,600

Required:

1. (i)Show how the above changes in value of the current software will be treated in the financial statements of CGL for the year ended 31 December, 2017.
2. (7 marks)
3. (ii)Redraft the statement of changes in equity above incorporating the adjustments.
4. (5 marks) (Total 20 marks)

Question 5

(a) Standover Limited's accounting manual refers to IFRS 13: Fair Value Measurement. It provides intensive guidance on how the fair value of assets and liabilities should be established. The Standard applies when another IFRS requires or permits fair value measurements or disclosures. In addition to the above standard, the CEO of Standover Limited has had challenges in the past regarding IAS 20: Accounting for Government Grants and Disclosure of Government Assistance.

The CEO has provided the following information relating to the different levels of the inputs for arriving at fair value of some item of equipment. This equipment could be sold in two different active markets at different prices on the same measurement date and the details for the transactions in the two markets are as follows:

Selling price Shs '000'

Market A 650,000 Market B 625,000

Transaction cost Shs '000'

75,000 25,000

Transport costs Shs '000'

50,000 50,000

You are the accountant of Standover Limited and You are required to compute the fair value of this kind of equipment and identify the appropriate level of inputs used in arriving at the fair value.

Required:

1. (i)Advise the management on the exceptional circumstances to the measurement and disclosure requirements of IFRS 13 Fair Value Measurement.
2. (6 marks)
3. (ii)Compute the fair value of this kind of equipment and identify the appropriate level of inputs used in arriving at the fair value given that:

• A is the principal market for this item of equipment.
• Neither market is the principal market for this item of equipment.
• (4 marks)

1. (iii)Advise the CEO on the principal aspects of each level of inputs for arriving at fair value.
2. (2 marks)

(b) The CEO further informed you that Standover Limited purchased an item of equipment for Shs 250 million on 1 April, 2015 and installed it on a leasehold land whose fair value on purchase date was Shs 673.75 million. The lease covers a period of 49 years to the year 2060 and may be renewed thereafter based on the investment strategies of the company.

The fair value of the leasehold land of Shs 673.75 million is payable in equal installments over the lease period. The equipment has a ten-year life and an expected residual value of Shs 10 million. The company's policy is to charge depreciation on straight-line basis. The company also received a government grant Shs 90 million on the same date for the purchase of the above equipment. It is the company policy to credit government grants to deferred income.

Required:

Show the necessary entries to be made in the statement of profit or loss and comprehensive income and statement of financial position for the years ended 31 March, 2016 and 2017, given that the annual profits before charging depreciation and amortisation for each of the years are Shs 120 million.

(8 marks)