Question 1 On 1st January 2021, Nkana Plc issued 80 million K1 preferred shares at a premium of K0.5 each. Issue Costs totalled K1.5 million. The shares carry a fixed dividend of 6%. The dividend is paid annually in arrears on the 31st of December. The shares will be redeemed on 1st January 2026 at a premium of K73.6m. The effective rate of interest on these shares is 9%. Required: Show how these shares will be reported in the financial Statements of Nkana plc for the years 2021 to 2025. Nkana plcs year-end is 31st December (7 marks) During the preparation of the draft financial Statements for Lushomo for the year to 31st March 2020 the following problems have arisen: - On 1st January 2020 Lushomo entered into an agreement with Mpandamano Financial Services to factor in its trade receivables. A representative of Mpandamano Financial Services analyzed Lushomos trade receivables into three groups; - Group 1-these trade receivables would not be factoredin or administeredby Mpandamano Financial Services.They will be collected in the normal way byLushomo. - Group 2 - these trade receivables would be factored by Mpandamano financial services on a with recourse basis. A finance charge of 1% per month on the outstanding balance at the beginning of the month will be made. The terms of the recourse are that any individual balance outstanding after 3 months would be reimbursed by Lushomo in full. - Group 3-these trade receivables would be factored and collected "without recourse". Mpandamano Financial Services would pay Lushomo 95%of the book value of the trade receivables. - The following analysis of the trade receivable groups and related information has been made: Group 1 Group 2 Group 3 K000 K000 K000 Balance 1 January 2020 500 600 800 of 1 January balance collected in January 30% 40% 50% of 1 January balance collected in February 30% 30% 25% of 1 January balance collected in March 20% 20% 22% Lushomos policy is to make an allowance for doubtful debts of receivable balance when it becomes 3 months old. Required: Calculate the charge for doubtful debts and finance costs relating to each group of trade receivables for the period 1st January 2020 to 31st March 2020, and show the value at which these trade receivables would appear on the statement of financial position of Lushomo at 31st March 2020. [8 marks] Hannah is an entity that prepares financial statements to 31 December each year. On 1 January 2021 the entity originated two transactions in financial instruments: (i) Hannah borrowed K15 million - incurring transaction costs of K100,000 to obtain the loan. The terms of the loan are that the entity pays interest of K900,000 on 31 December each year and the loan is repayable at a substantial premium on 31 December 2024. The effective annual interest rate associated with this loan is 10%. The annual interest was paid on 31 December 2021 and Hannah intend to retain the loan until its repayment date. The fair value of the loan on 31 December 2021 was K16 million. [5 marks] (ii) Hannah made a strategic investment of K10 million in another entity, Luyando. This investment represents an equity stake of 15%. Hannah is unsure whether or not this investment will be sufficient to give Hannah significant influence over the operating and financial policies of Luyando. The investment has no fixed maturity date and Hannah has no plans to dispose of it. During the year ended 31 December 2022, Luyando made a net profit of K3 million but paid no dividends. The fair value of the investment at 31 December 2022 was K11 million. Required: Advise the directors of Hannah on how to account for the transactions above. [5 marks] Question Two You are an independent financial advisor and have been given the following details relating to Rapido: Summary statements of financial position 31 December 2020 2021 2021 Actual Budget Actual K000 K000 K000 Assets Non-current assets Tangible assets 957 1,530 1,620 Current assets Inventory 205 290 325 Trade receivables 305 720 810 Cash and bank balances 175 0 0 Total assets 1,642 2,540 2,755 Equity and liabilities Capital and reserves Equity shares 800 800 800 Share premium account 200 200 200 Retained earnings 280 420 460 1,280 1,420 1,460 Non-current liabilities Secured loans 0 360 360 Current liabilities Trade and other payables 175 505 545 Bank overdraft 187 255 390 362 760 935 Total liabilities and equity 1,642 2,540 2,755 Statements of profit or loss for the year ended 31st December 2020 2021 2021 Actual Budget Actual K000 K000 K000 Revenue 2,560 4,500 5,110 Cost of sales (1,700) (3150) (3,580) Gross profit 860 1,350 1,530 Administration and distribution (655) (880) (1,084) Operating profit 205 470 446 Interest payable - (20) (35) 205 450 411 Taxation (86) (202) (182) 119 248 229 Extract from the statement of changes in equity: Dividends 82 108 49 The opening inventory figure for 2020 was K135,000 actual and K210,000 for 2021 budget. Required: Using the above information and appropriate ratios, prepare a report for the board of directors of Rapido assessing the profitability, liquidity, and solvency of the company and suggesting the necessary action to be taken. [7 marks]