Question
Question 1 Chandara Holdings Ltd (Chandara), a listed company, is a major manufacturer of laundry and toiletry products in the country. The following statements of
Question 1
Chandara Holdings Ltd (Chandara), a listed company, is a major manufacturer of
laundry and toiletry products in the country. The following statements of profit or
loss for the year ended 30 June, 2018 relate to Chandara, Agara Ltd (Agara) and
Bagara Ltd (Bagara):
Chandara Agara Bagara
Shs 'million' Shs 'million' Shs 'million'
Revenue 156,700 90,000 54,000
Cost of sales (109,000) (72,000) (45,000)
Gross profit 47,700 18,000 9,000
Other income 17,000 6,000 3,000
Distribution costs (25,000) (5,400) (3,000)
Administrative expenses (8,000) (6,000) (2,400)
Other expenses (2,000) (1,500) (1,800)
Finance costs (6,000) (4,500) (900)
Profit before tax 23,700 6,600 3,900
Income tax (5,600) (2,400) (300)
Profit for the year 18,100 4,200 3,600
Additional information:
1. On 1 July, 2017Chandara acquired 20% of the shares in Agara for Shs
2,700 million. Agarasupplies materials which are vital for the manufacture
of laundry and toiletry products. The market price per share of Agara
before the date of acquisition was Shs 300,000.
2. On 1 January, 2018 Chandara acquired an additional 45% of the shares in
Agara and paid Shs 6,500 million. The market price of Agara's shares
before the date of acquisition was Shs 310,000 per share.
3. Government of Uganda, in appreciation of efforts by Agara to use
environmentally friendly production technologies, contributed 70% of the
cost of purchase of a production unit by Agara, which was imported from
Germany in April 2018. This unit cost AgaraShs 2.4 billion.Agara
recognised the entire grant in profit or loss as other comprehensive
income for the year ended 30 June, 2018. The expected useful life of the
unit is 20 years with nil residual value. The group uses the income
approach to treat such contributions.
4. Agara sold equipment to Chandarafor Shs 1.8 billion on 1 January, 2018.
This equipment cost AgaraShs 2 billion on 1 July, 2016. The group
depreciates such equipment at 20% on reducing balance basis.Each company charged depreciation on the equipment based on the time period
they owned the equipment during the year. Any gain or loss on disposal is
recognised in other income while depreciation is charged to administrative
expenses.
5. On 1 October, 2017 Chandara acquired 70% of the shares of Bagara for
Shs 9.6 billion. The market price of Bagara's sharesbefore the date of
acquisition was Shs 320,000 per share.
6. Bagara sells electronic goods with warranty which guarantees repair of the
goods should they develop defects within one year. The company's past
experience and future projections reveal the following:
Number of units sold Defects Cost of repairs incurred
Shs 'million'
405 None -
035 Moderate 15
045 Minor 20
015 Major 17
Any effect of the warranty is to be recognised inadministrative expenses.
7. The equity of the three companies as at 30 June, 2018 was as follows.
Chandara Agara Bagara
Shs 'million' Shs 'million' Shs 'million'
Share capitalShs 100,000each 10,000 5,000 3,000
Retained earnings 19,870 7,895 6,250
29,870 12,895 9,250
The equity of the companies represented the fair values of their net assets
throughout the year.
8. Chandara values non-controlling interest at fair value.
9. The group carried out impairment tests on goodwill and confirmed losses
of 20% and 10% of the goodwill from Agara and Bagara respectively,
which is to be recognised in administrative expenses Required:
(a) Prepare Chandaragroup'sconsolidated statement of profit or loss for
the year ended 30 June, 2018. (Show all your workings).
(40 marks)
(b) In a bid to improve its performance, the Board of Directors of
Chandara decided to enter into a joint operation with Aguu Ltd to
exploit their respective competences in production and marketing of
a unique product, 'Cleanex' and a joint venture with Kampala Ltd to
enter a market which hitherto had been difficult to access. The
Board has asked the head of finance to advise them on the relevant
accounting treatment with regard to the group and Chandara.
Required:
Prepare report to the Board discussing the accounting treatment
of the interests in the joint arrangements in Chandara'sseparate
financial statements and group consolidated financial statements. 1. The tax rate is 40%.
2. Agrop Computing Ltd made a 1for4 rights issue on 1October, 2017 at
Shs1,500 per share when the market price per share was Shs 1,800. In
addition, the company issued 20,000 shares at full market price on 1 April,
2018.
3. On 1 October, 2017 Ladu Infosys Ltd made a bonus issue of 1 share for
every 4 shares and on 1 April, 2018 the company made a 1for5 rights
issue at Shs 2,000 per share when the market price per share was Shs
2,500.
4. At the beginning of the year, Kodi Hi-tech Ltd issued a Shs 200 million 2%
loan stock, convertible in five years' time at a rate of 1 share per Shs
2,000 of loan stock. KodiHi-tech Ltd also issued Shs 600 million preference
shares convertible in three years' time at a rate of 1 share perShs 3 of
preference shares. Preference shareholders are entitled to dividends of Shs
20 per share.
(10 marks)
Required:
(a) Calculate the earnings per share (EPS) for each company as it would
be disclosed in the financial statements for the year ended 30 June,
2018 including comparative information.
(Show all your workings).
(20marks)
(b) Kodi Hi-tech Ltd operates a number of businesses in various parts of
the country. On 1 January, 2018 the Board advised managementto
take steps to identify all reportable segments of the company and
report on them, if at all they existed.From the explanations and
information obtained from different business units, management felt
that such reports might actually be very informative given the nature
of their businesses.
Required:
Discuss how the management of Kodi Hi-tech Ltd would identify
reportable segments.
(5 marks)
(Total 25 marks)
Question 3
You are employed by Mangu Ltd, a company involved in several business sectors
including agriculture, manufacturing, specialised electrical equipment, and
transport among others. You recently completed your CPA course and the
management promoted you to deputy financial controller. The company's
financial year end is 30 June. The financial controller has asked you to review
and advise on the treatment of the following transactions:
1. After realizing that the carrying amount of the units of specialised electrical
equipment reflected their fair values after revaluation, the Board resolved
to revalue all the company's assets, as follows.
(a) A plant on Jinja Road purchased on 1 July, 2015 at a cost Shs 250
million was revalued to Shs 180 million on 30 June, 2017.
(b) One of the units of specialisedelectrical equipment had been
revalued on 1 July, 2016 to Shs 77 million resulting in a revaluation
loss of Shs 17 million which was disclosed in the financial statements
for the year ended 30 June, 2017. The unit was revalued to Shs 90
million at yearend on 30 June, 2018. The equipment was purchased
on 1 July, 2013.
(c) The company depreciates plant and specialised electrical equipment
on a straight-line basis for 10 years with no residual values.Revaluations do not affect the remaining useful lives of the
assets.
2. The company has a milling unit which is used by the residents in the
neighbouring villages for processing maize and rice at a fee. By law, the
company is to dismantle and remove the milling unit from the site once it
is no longer suitable for use. This unit was purchased and installed on 1
July, 2012 for Shs 150 million. Due to its strategic location, market
participants are willing to pay Shs 80 million and also ensure its removal
once it is deemed unsuitable for use. The present value of the estimated
cash flows from the continued use of the milling unit is Shs 82 million. The
unit is depreciated at 10% per annum on a reducing balance basis.
3. The company has a dairy farm which has been in existence for a while. On
1 July, 2017, the company had 200 2year-old cows. On 1 October, 2017
40 cows calved while another 50 calved on 1 April, 2018. In addition, the
company purchased 60 2year-old cows on 1 March, 2018. The values less
costs to sell during the year were as follows:
Date Description Value (Shs)
1 July, 2017 2 yearsold 3,000,000
1 October, 2017 New born 900,000
1 March, 2018 2 years old 2,500,000
1 April, 2018 New born 950,000
30 June, 2018 3years old 3,600,000
30 June, 2018 9 months old 1,500,000
30 June, 2018 2years old 3,200,000
30 June, 2018 3 months old 1,100,000
30 June, 2018 2years old 3,500,000
30 June, 2018 New born 1,000,000
30 June, 2018 2 years old 2,700,000
It is companypolicy to segregate increase in fair value less cost to sell
between the portion attributable to physical changes and the portion
attributable to price changes.
4. While reviewing board minutes to help you in the drafting of the financial
statements for the year ended 30 June, 2018 you discovered that, the
Board had approved the sale of their Tungsten processing plant located in
western Ugandaand on inquiry from management, you got confirmation
that indeed a broker had been engaged to find market for the plant. The
broker believed that the sale would be completed within the next nine
months. The plant was purchased on 1 July, 2010 at cost Shs 4 billion and
depreciated at 5% on straight-line basis. The fair value less costs to sell of
the plant was Shs 2.2 billion. Management believed that the shareholders Required:
Prepare report to the financial controller discussing the accounting
treatment of the above transactions (1 - 4) in the financial statements for
the year ended 30 June, 2018 in accordance with the relevant
accountingstandards.
Show workings/calculations as an annex to your report and also identify
the applicable standards.
(25 marks)
Question 4
Zanda Ltd is a foreign company with branches in different parts of the world. The
company recently established a branch in Uganda to manufacture and distribute
computer accessories in the region. The legislation in some countries requires
the branches in those countries to report according to the local accounting
standards. The company has appointed you to the team of experts to hold
discussions with governments of the countries whose legislations require
compliance with local accounting standards.
On his part, the managing director of the Ugandan branchof Zanda Ltd is
interested in the performance of Zanda Ltd as a group and the individual
branches in other countries. In his quest for relevant information, he was
overwhelmed by the volume of the business reports for Zanda Ltd as well as for
other companies on the Internet. In a recent meeting for senior management, he
noted that there was increasing use of business reporting on the Internet by a
multitude of companies.
Required:
Prepare memo discussing the:
(a) benefits of international harmonisation of accounting standards.
(15 marks)
(b) case for web-based business reporting.
Question 5
(a) You have been recently appointed the head of finance of Abuka Ltd
(Abuka). While preparing the financial statements for the year ended 30
June, 2018 you came across the following transactions:
1. Abuka purchased a warehouse in another country on 1 July, 2017
for US dollars (USD) 1 million. The warehouse is meant to be used
as a store for the company's goods which are sold in that country.
The warehouse was revalued to USD 1.2 million on 30 June, 2018.
The following exchange rates were applicable during the year:
Date USD 1 to Shs
1 July, 2017 3,200
30 June, 2018 3,550
Average rate 3,400
2. Thecompany constructed four similar office blocks ten years ago at a
cost of Shs 5.6 billion. On 1 July, 2017 management decided to
house all the staff in one block leaving the rest vacant. The vacant
blocks were immediately rented out. The company's policyis to
depreciate such blocks at 5% per annum on a straight-line basis.
The fair value less cost to sell the blocks is Shs 4.9 billion.
3. On 1 July, 2015 Abuka acquired sophisticated production machinery
atShs 2.5 billion to be depreciated on a straight-line basis for 20
years. On 30 June, 2018 the machinery was revalued to Shs 2.7
billion. The capital allowance for this machinery is 20% on a
reducing balance basis. The tax rate was reduced from 40% to 30%
in the fiscal year 2017/2018. In addition, the carrying value of
company inventory was Shs 3 billion while its fair value less costs of
sale was Shs 2.7 billion. For tax purposes, losses are deductible in
the fiscal year the inventory is sold. The balance on the deferred tax
account on 1 July, 2017 was Shs 75 million.
4. In a bid to encourage commitment of the staff, the Board of
Directors of Abuka granted 1,000 share options at an exercise price
Shs 30,000 per share to each of the company's 200 key staff on
condition that they would work for the company for the next five
years. The par value and market value of each share wereShs
10,000 andShs 25,000 respectively.2% of the staff left the company
by 30 June, 2017. The company estimated the options would vest
with the remaining 98% of the staff and made a provision of Shs 1
billion in the financial statements for the year ended 30 June, 2017.
The share price of the company fell in July 2017 and on 1
January,2018 the company modified the share option scheme by reducing the exercise price to Shs 19,000. The fair value of the
option was Shs 8,000 immediately before the share price fell and
Shs 15,000 immediately after. On 30 June, 2018 the company
estimated that the options would vest with 90% of the staff.
Required:
Discuss the accounting treatment of each of the above transactions
(1- 4)in the financial statements of Abuka in accordance with
relevant accounting standards.
(Support your discussion with workings/calculations based on
applicable international financial reporting standards). (20 marks)
(b) Abuka operates a mining facility in Lajambo village near LakeJosy. The
village is inhabited by cattle-keepers who have lived in this village for a
long time because of its nutritious pastures. The by-products from the
mine and water refuse flow through the land to lake Josy. The company
has received a lot of complaints from the cattle-keepers and the fishermen
about the effect of the by-products and water refuse on their activities.In
fact, the health of the cows has deteriorated leading to high costs of
treatment. They have also reported low milk yields recently. The fishermen
have reported increasing cases of floating dead fish.
The villagers have reported the matter to their political leaders and
threatened to take the law in their hands if government does not take
action against the company. The company has taken drastic steps to
mitigate the effect of the by-products and water refuse to the cattle-
keepers and the fishermen. However, these steps may take some time to
yield results.
Your previous advice on environmental reporting was rejected by the
managing director claiming that the issue of environmental impact on the
grazing land and the lake was being addressed and would soon be history.
The company was running a programme of free cattle treatment and
providing an alternative source of livelihood to the fishermen. He has,
however, half-heartedly accepted your plea to have audience with him on
this matter in a few days' time.
Required:
In preparation for the meeting with the managing director, write memo
highlighting the case for environmental reporting.
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