QUESTION Domiciled in Zambia and listed on the Lusaka Securities Exchange, Real Estate Investments Zambia Plc (REIZ) (formerly Farmers House Plc) is primarily involved in investment, development and restructuring of commercial and non-commercial property for letting. Its defined expansion strategy, implemented successfully since 2000, and has grown an impressive property portfolio which is a strong basis upon which it has continued its growth. REIZ strategy is now evolving to include residential and commercial property in their portfolio in future. Below is the five year financial summary for REIZ. FIVE YEAR FINANCIAL SUMMARY (KWACHA) STATEMENT OF COMPREHENSIVE INCOME-K For the ended 31 December 2019 2018 2017 2016 2015 K 000 %6 * 100 % K 000 K 100% K1000 % Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 67,393 (8,493) 11,705) (7,329) 1,019) 13% 17% 50,579 65,164 75,782 57,391 8,081) 169 7,611) 129 1,147) 99 11,637) 20% 20,231) 204 (11,753) 18% 12,184) 16% 9,955) 17% 3,973) 89 14,634) 79 0,128) 1% (1,121) 296 (560) 1% (583) 196 653) 1% 504) 196 11% 3% 37.847 56% 27,73 4 554 Profit from operations 40,483 629 54,670 72% 34,174 50% 26 70 20 90 2,464 53,504 26,325 2,154 61,628) 445,734 Other operating income Change in fair value of lowestment property Netinterestexpense Exchange floss) Again Profit(loss) before tax (27,150) (16,201) (10,178) (10,440) 11,483) B7,706) 28.289) 156) 5,415 26,139) 26,521 9,639 32,413 (11,893) 444,750 Income tax expense Profit loss) after tax 6,728) 19,793 16,815) 2,824 (7,380) 25,033 8,840) 20,733) (11,220) 83,530 STATEMENT OF FINANCIAL POSITION 2018 2017 2015 2019 K 000 2016 K 600 K 000 K 000 K 000 Plant and equipment 8,608 1,748 2,394 1,954 113,605 951,785 838,842 Investment properties Investment property under development Rental income receivable after 12 months 805,222 24,309 864,594 23,102 26,943 1,041,974 22,982 2,673 7,140 7,849 31,666 5,107 12,415 96,504 Current assets 36,435 93,721 77,695 41,771 1,134,123 Total Assets 1,026,444 972,491 932,786 975,194 798,952 Shareholders' funds and liabilities Total equity Non-current liabilities Total current liabilities 804,202 821,405 792,155 127,939 823,615 140,958 156,053 284,920 37,798 197,301 30,191 12,692 10,621 12,236 Total equity and liabilities 1,134,123 1,026,444 972,491 932,786 975,194 Early 2017, REIZ , design and started to construct a complete modernization of Parkway which is on the prime land bank situated, along Kafue Road, approximately 10 kilometres south of the Central Business District of Lusaka. Construction began on January 1, 2017 and was completed on December 31, 2018. The following payments were made towards this project during 2017 and 2018: Date Payment January 1, 2017 K3, 600,000 August 31, 2018 5,400,000 December 31, 2018 4,500,000 In order to help finance the construction, REIZ, issued the following during 2017: 1. K3,000,000 of 10-year, 9% bonds on January 1, 2017, with interest payable annually in arrears on December 31. The effective interest rate on this bond is 10%.REI will hold this bond till maturity. In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K12,500, 000, 12% note payable dated January 1, 2015 and due January 1, 2025, with interest payable annually on January 1.The expected useful life of Parkway is 20 years with the nil salvage value and is depreciated using straight-line method. The accountants of REIZ have recorded all the interest cost relating to the construction of this asset as part of expenses in the years during the construction. Required a) Citing relevant accounting standards discuss and explain how the interest expense during construction would have been accounted for in the financial statement. (Smarks) b) Compute the interest that you think has been expensed by the accountants relating to the construction for the years 2017 and 2018.(8 marks) c) Basing on the explanation in (a) above prepare all the necessary Journal entries to correct and update the books relating to the cost of this asset.(15 mark) QUESTION Domiciled in Zambia and listed on the Lusaka Securities Exchange, Real Estate Investments Zambia Plc (REIZ) (formerly Farmers House Plc) is primarily involved in investment, development and restructuring of commercial and non-commercial property for letting. Its defined expansion strategy, implemented successfully since 2000, and has grown an impressive property portfolio which is a strong basis upon which it has continued its growth. REIZ strategy is now evolving to include residential and commercial property in their portfolio in future. Below is the five year financial summary for REIZ. FIVE YEAR FINANCIAL SUMMARY (KWACHA) STATEMENT OF COMPREHENSIVE INCOME-K For the ended 31 December 2019 2018 2017 2016 2015 K 000 %6 * 100 % K 000 K 100% K1000 % Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 67,393 (8,493) 11,705) (7,329) 1,019) 13% 17% 50,579 65,164 75,782 57,391 8,081) 169 7,611) 129 1,147) 99 11,637) 20% 20,231) 204 (11,753) 18% 12,184) 16% 9,955) 17% 3,973) 89 14,634) 79 0,128) 1% (1,121) 296 (560) 1% (583) 196 653) 1% 504) 196 11% 3% 37.847 56% 27,73 4 554 Profit from operations 40,483 629 54,670 72% 34,174 50% 26 70 20 90 2,464 53,504 26,325 2,154 61,628) 445,734 Other operating income Change in fair value of lowestment property Netinterestexpense Exchange floss) Again Profit(loss) before tax (27,150) (16,201) (10,178) (10,440) 11,483) B7,706) 28.289) 156) 5,415 26,139) 26,521 9,639 32,413 (11,893) 444,750 Income tax expense Profit loss) after tax 6,728) 19,793 16,815) 2,824 (7,380) 25,033 8,840) 20,733) (11,220) 83,530 STATEMENT OF FINANCIAL POSITION 2018 2017 2015 2019 K 000 2016 K 600 K 000 K 000 K 000 Plant and equipment 8,608 1,748 2,394 1,954 113,605 951,785 838,842 Investment properties Investment property under development Rental income receivable after 12 months 805,222 24,309 864,594 23,102 26,943 1,041,974 22,982 2,673 7,140 7,849 31,666 5,107 12,415 96,504 Current assets 36,435 93,721 77,695 41,771 1,134,123 Total Assets 1,026,444 972,491 932,786 975,194 798,952 Shareholders' funds and liabilities Total equity Non-current liabilities Total current liabilities 804,202 821,405 792,155 127,939 823,615 140,958 156,053 284,920 37,798 197,301 30,191 12,692 10,621 12,236 Total equity and liabilities 1,134,123 1,026,444 972,491 932,786 975,194 Early 2017, REIZ , design and started to construct a complete modernization of Parkway which is on the prime land bank situated, along Kafue Road, approximately 10 kilometres south of the Central Business District of Lusaka. Construction began on January 1, 2017 and was completed on December 31, 2018. The following payments were made towards this project during 2017 and 2018: Date Payment January 1, 2017 K3, 600,000 August 31, 2018 5,400,000 December 31, 2018 4,500,000 In order to help finance the construction, REIZ, issued the following during 2017: 1. K3,000,000 of 10-year, 9% bonds on January 1, 2017, with interest payable annually in arrears on December 31. The effective interest rate on this bond is 10%.REI will hold this bond till maturity. In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K12,500, 000, 12% note payable dated January 1, 2015 and due January 1, 2025, with interest payable annually on January 1.The expected useful life of Parkway is 20 years with the nil salvage value and is depreciated using straight-line method. The accountants of REIZ have recorded all the interest cost relating to the construction of this asset as part of expenses in the years during the construction. Required a) Citing relevant accounting standards discuss and explain how the interest expense during construction would have been accounted for in the financial statement. (Smarks) b) Compute the interest that you think has been expensed by the accountants relating to the construction for the years 2017 and 2018.(8 marks) c) Basing on the explanation in (a) above prepare all the necessary Journal entries to correct and update the books relating to the cost of this asset.(15 mark)