Question 2 (40 marks) CEC Africa investment Limited (CECA) W stabied in caly 2013 as aparican company with a mandate to develop, finance and operate power projects as Sub-Saharan Africa Sponsored by one of Africa's most successful private utiles (CEC Plc from Zambia, CECA was set up to leverage indigenous talent in the power sector and bring about the necessary capital to assist in building Arica's energy platform CEC was incorporated under a Calugory 1 Go Business License company in Maurus and is determined to follow latest intentional financial reporting standards (IFRSs). The summary of the francial overview for the last five years up to 2019 is shown below. FIVE-YEAR REVIEW 2019 2018 2017 2016 2015 INCOME STATEMENT 189,532 101,471 92419 80.2181 421.203 110.227 92.162 11.873) (12) 90,304 79,951 68,351 17,276) 0001 50,135 (2,0101 BITDA Operating profitos Ne finance costs Share of profits from joint ventures Profit/ oss before tax Taxation Net profit loss) attributable to equity holders of the Company Headine earnings attributable to shareholders 75,128 1241 157,2051 126A21 61,075 (21.5500 48,125 114.5201 55,256 46,375 19,525 (113,6571 10.0701 31,005 0.022 0.014 0.030 0.024 STATEMENT OF FINANCAL POSITION Property, plant and equipment Investment in Subsidiaries Total non-current assis 441367 4,11 19,029 414514 17,635 43.170 149,168 585,33 233,29 27,744 380,613 161,615 441,969 200.101 642.00 400,634 31,036 550,282 171,372 721,654 455,619 182,426 610,000 Current assets Totales 542,228 CASH FLOW Net cash inflow/outflow from operating activa Net cash outflow from investing activities Net cash outflowi/ inflow from financing activities Netcash increase/ decrease for the year 74,112 (15,564) 58,371 (8,177) 75,978 (16,002) 440,520) 11.556 47,736 (25,192) (15,536) 28,033 156,6101 57,551 (36,0201 144,9041 22,528 5.290 7,000 33.974 RATIOS AND STATISTICS Earrings Earnings per share 0.014 0.030 10.00 0.024 0.022 Headline earnings per share Dividend per share 0.016 1.9 2013 2.3 0.010 1691 0.009 2.B 0 0 Dividend cover Profitability Operating margin 13N 17% 12% 15% 132N1 123 11% 11% 10% 125 125 12% Return on capital employed Return on equity attributable to Shareholders Financial Nu debt to equity 36% 16% 1.91 21% 18 294 1.63 Durrent ratio 27* 1.59 157 Liquidity ratio 185 1.59 12:27 If bullull B/s 84 After the analysis of detailed financial statement you have come across the transaction involving one of the machines being used by CEC in the production plant which was leased from ZESCO. ZESCO leased this new asset to CEC under a 5-year, non-cancellable contract starting January 1, 2018. Terms of the lease require payments of $485,550 each January 1, starting January 1, 2018. The machine has an estimated life of 7 years. The estimated guaranteed value is $600,000 while the residual value is expected to be $450,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. CEC Page 6 of 8 and ZESCO s financial year end is at December 31 all the risks and rewards of the machine are for ZESCO. The interest rate implicit in the lease 8%.CEC depreciates similar assets using straight-line. You have noticed that CEC has accounted for this lease as an operating. Required a) Citing relevant accounting standards explain why CEC might have accounted for this as an operating lease. And show the journal entry that was recorded by CEC in 2018 and 2019 (3 marks) b) Assuming that in 2018 CEC went for the early adoption of the new IFRS 16 lease standard. Discuss the accounting treatment that should have applied by the CEC on this lease contract.( 4 marks) c) Prepare all the entries relating to the treatment in (b) for the years 2018 and 2019 that CEC should record. (10 marks) d) Citing relevant accounting standards and using supporting figures explain how and why the 2017 financial statements will be affected by this early adoption. (4 marks) e) With the help of supporting figures, explain the effect that this adoption will have on the above income statement and above statement of financial position extract for the years 2018 and 2019(8 marks) f) With the help of supporting figures explain the effect that this adoption will have on the above cash flow extract for the years 2018 and 2019(5 marks) g) State the ratios which will be affected by the above adoptions and explain whether the ratio will increase or decrease and why. (6 marks) Question 2 (40 marks) CEC Africa investment Limited (CECA) W stabied in caly 2013 as aparican company with a mandate to develop, finance and operate power projects as Sub-Saharan Africa Sponsored by one of Africa's most successful private utiles (CEC Plc from Zambia, CECA was set up to leverage indigenous talent in the power sector and bring about the necessary capital to assist in building Arica's energy platform CEC was incorporated under a Calugory 1 Go Business License company in Maurus and is determined to follow latest intentional financial reporting standards (IFRSs). The summary of the francial overview for the last five years up to 2019 is shown below. FIVE-YEAR REVIEW 2019 2018 2017 2016 2015 INCOME STATEMENT 189,532 101,471 92419 80.2181 421.203 110.227 92.162 11.873) (12) 90,304 79,951 68,351 17,276) 0001 50,135 (2,0101 BITDA Operating profitos Ne finance costs Share of profits from joint ventures Profit/ oss before tax Taxation Net profit loss) attributable to equity holders of the Company Headine earnings attributable to shareholders 75,128 1241 157,2051 126A21 61,075 (21.5500 48,125 114.5201 55,256 46,375 19,525 (113,6571 10.0701 31,005 0.022 0.014 0.030 0.024 STATEMENT OF FINANCAL POSITION Property, plant and equipment Investment in Subsidiaries Total non-current assis 441367 4,11 19,029 414514 17,635 43.170 149,168 585,33 233,29 27,744 380,613 161,615 441,969 200.101 642.00 400,634 31,036 550,282 171,372 721,654 455,619 182,426 610,000 Current assets Totales 542,228 CASH FLOW Net cash inflow/outflow from operating activa Net cash outflow from investing activities Net cash outflowi/ inflow from financing activities Netcash increase/ decrease for the year 74,112 (15,564) 58,371 (8,177) 75,978 (16,002) 440,520) 11.556 47,736 (25,192) (15,536) 28,033 156,6101 57,551 (36,0201 144,9041 22,528 5.290 7,000 33.974 RATIOS AND STATISTICS Earrings Earnings per share 0.014 0.030 10.00 0.024 0.022 Headline earnings per share Dividend per share 0.016 1.9 2013 2.3 0.010 1691 0.009 2.B 0 0 Dividend cover Profitability Operating margin 13N 17% 12% 15% 132N1 123 11% 11% 10% 125 125 12% Return on capital employed Return on equity attributable to Shareholders Financial Nu debt to equity 36% 16% 1.91 21% 18 294 1.63 Durrent ratio 27* 1.59 157 Liquidity ratio 185 1.59 12:27 If bullull B/s 84 After the analysis of detailed financial statement you have come across the transaction involving one of the machines being used by CEC in the production plant which was leased from ZESCO. ZESCO leased this new asset to CEC under a 5-year, non-cancellable contract starting January 1, 2018. Terms of the lease require payments of $485,550 each January 1, starting January 1, 2018. The machine has an estimated life of 7 years. The estimated guaranteed value is $600,000 while the residual value is expected to be $450,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. CEC Page 6 of 8 and ZESCO s financial year end is at December 31 all the risks and rewards of the machine are for ZESCO. The interest rate implicit in the lease 8%.CEC depreciates similar assets using straight-line. You have noticed that CEC has accounted for this lease as an operating. Required a) Citing relevant accounting standards explain why CEC might have accounted for this as an operating lease. And show the journal entry that was recorded by CEC in 2018 and 2019 (3 marks) b) Assuming that in 2018 CEC went for the early adoption of the new IFRS 16 lease standard. Discuss the accounting treatment that should have applied by the CEC on this lease contract.( 4 marks) c) Prepare all the entries relating to the treatment in (b) for the years 2018 and 2019 that CEC should record. (10 marks) d) Citing relevant accounting standards and using supporting figures explain how and why the 2017 financial statements will be affected by this early adoption. (4 marks) e) With the help of supporting figures, explain the effect that this adoption will have on the above income statement and above statement of financial position extract for the years 2018 and 2019(8 marks) f) With the help of supporting figures explain the effect that this adoption will have on the above cash flow extract for the years 2018 and 2019(5 marks) g) State the ratios which will be affected by the above adoptions and explain whether the ratio will increase or decrease and why. (6 marks)