Question one Lafarge is French industrial company specialising in three major products: cement, construction aggregates, and concrete. Lafarge Zambia operates 2 integrated cement plants (situated in Ndola and Lusaka) with a total production capacity of 1.4 million tonnes per annum. The 440 direct employees supported by several hundred more contracted employees continue to add value to the country's raw materials that lead to the production of 6 innovative products including Mphamvu, the flagship product brand, Powerplus for heavy industrial construction, Supaset, the preferred choice for block makers, RoadCem for soil stabilization during road construction, Powercrete, designed for applications in the mining industry, including back filling, rock bolting, stopping and shotcreting, and WallCrete, masonry with superior workability, ideal for bricklaying, plasterwork, floor screed and pointing, whether for large construction projects or individual homebuilders. With a firm focus on innovation and optimising operations, the Company continues to promote value addition and continually create jobs directly and indirectly through forward and backward linkages within and outside the sector. The Company supplies products by road and rail to the entire country, as well as the regional market, primarily to the Tanzania, Burundi Democratic Republic of Congo (DRC), Malawi, Namibia and Zimbabwe. In addition the Aggregates business continues to produce high quality fine, course and dense grade aggregates products, suitable for a wide variety of construction applications, from concrete to road and highway surfaces, railway ballast and fill material. Below are the financial statement for the year 2018 which the chief financial officer is about to submit for audit. STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 Kwacha thousands Notes 2018 2017 5 1,141,800 1,008,232 Revenue Cost of sales (565,859) (527,690) Gross profit 575,941 480,542 Selling and distribution expenses Marketing expenses Administration expenses (207,905) (151,297) 6 (8,661) (9,998) Operating profit Investment income Other gains and losses Finance costs 7 (265,122) (252,533) 9 94,253 66,714 PROFIT BEFORE TAX 10 730 Income tax credit ( expense ) 12 1,975 10,126 (2,045) (7,378) PROFIT FOR THE YEAR (2,555) Other comprehensive income 104,309 57,511 Total comprehensive income for the year 90,589 (38,573) Basic and diluted earnings per share with exceptional 13 corporate tax credit) (Kwacha) Basic and diluted earnings per share (from normal results 13 for the year) (Kwacha) 194,898 18,938 194,898 18,938 0.97 0.09 0.37 0.09 2018 2017 STATEMENT OF FINANCIAL POSITION For the year 2018 in thousands 14 1,537,788 Property, plant and equipment Intangible assets Equity Investment at fair value 1,500,523 477 15 515 16 25 126 25,266 Total non-current assets 1,526,356 1,563,429 17 207,590 125,332 164,345 87,752 18.1 Current assets Inventories Trade receivables Other receivables Amounts due from related companies Bank and cash balances Current tax asset 182 99,250 48,442 19 21,517 72,684 72,163 58,319 121,317 21 195 Total current assets 648, 169 452,737 2,174,515 2,016,166 Total assets EQUITY AND LIABILITIES Capital and reserves Issued capital Revaluation reserve Retained earings 21.1 21.2 21.3 10,002 10,002 479,363 1,159,160 502,237 998,990 Total equity 1,648,525 1,511,169 22 Non-current Rabities Provision for environmental abilities Retirement benefit plans Deferred tax liabilities 23 22,536 19,401 258 82 24 299.687 238,432 Total non-current liabilities 282,305 258,091 Current Nobitties Trade payables 25.1 Total current assets 648,169 452,737 Total assets 2,174,535 2,016,166 EQUITY AND LIABILITIES Capital and reserves Issued capital Revaluation reserve Retained earnings 21.1 21.2 21.3 10,002 479,363 10,002 502,237 1,159,160 998,930 Total equity 1,648,525 1,511,169 22 Non-current liabilities Provision for environmental liabilities Retirement benefit plans Deferred tax liabilities 22,536 23 19,401 82 258 24 259,687 238,432 Total non-current liabilities 282,305 258,091 Current liabilities Trade payables Other payables Amounts due to related companies 53,353 25.1 25.2 19 85,497 137,612 121,509 20,596 72,044 Total current liabilities Total liabilities 243,705 246,906 Total equity and liabilities 526,010 504,997 2,174,535 2,016,166 Before submitting the reports for audit the CFO has notice that the following information relating to the construction project of building the bridge which was awarded to Lafarge by the Road Development Agency (RDA) which commenced in 2017 has been omitted in the financial records. The initial price agreed in the contract is K90,000,000. Lafarge's initial estimate of contract costs is K80,000,000. It will take 3 years to build the bridge. By the end of year 2017, Lafarge's estimate of contract costs had increased to K80, 500,000.In year 2018, RDA approved a variation resulting in an increase in contract revenue of K2,000,000 and estimated additional contract costs of K1, 500,000. At the end 2018, costs incurred included K1000, 000 for standard materials stored at the site to be used in the year 2019 to complete the project.Lafarge determines the stage of completion of the contract by using the input method. A summary of the financial data during the construction period is as follows 2017 2018 2019 K,000 K,000 K,000 Initial amount of revenue agreed 90,000 90,000 90,000 Contract Cost incured in the year 20,930 40,750 20,320 The CFO has requested that you deal with this issue so that correct financial statements are submitted for audit Required a) Citing relevant accounting standard explain what type of error has been made by Lafarge and explain how this error will be accounted for in the books (5 marks) b) Prepare all the required journal entries to update the records of Lafarge (show all your working) 15 marks c) Prepare a new Income statement and the statement of financial position after recording the above omitted transaction.(10 marks) d) Discuss the effect that this omission had on the profit before tax for 2018 and the impact that it would have had to the users of financial statement.(10 marks) Question one Lafarge is French industrial company specialising in three major products: cement, construction aggregates, and concrete. Lafarge Zambia operates 2 integrated cement plants (situated in Ndola and Lusaka) with a total production capacity of 1.4 million tonnes per annum. The 440 direct employees supported by several hundred more contracted employees continue to add value to the country's raw materials that lead to the production of 6 innovative products including Mphamvu, the flagship product brand, Powerplus for heavy industrial construction, Supaset, the preferred choice for block makers, RoadCem for soil stabilization during road construction, Powercrete, designed for applications in the mining industry, including back filling, rock bolting, stopping and shotcreting, and WallCrete, masonry with superior workability, ideal for bricklaying, plasterwork, floor screed and pointing, whether for large construction projects or individual homebuilders. With a firm focus on innovation and optimising operations, the Company continues to promote value addition and continually create jobs directly and indirectly through forward and backward linkages within and outside the sector. The Company supplies products by road and rail to the entire country, as well as the regional market, primarily to the Tanzania, Burundi Democratic Republic of Congo (DRC), Malawi, Namibia and Zimbabwe. In addition the Aggregates business continues to produce high quality fine, course and dense grade aggregates products, suitable for a wide variety of construction applications, from concrete to road and highway surfaces, railway ballast and fill material. Below are the financial statement for the year 2018 which the chief financial officer is about to submit for audit. STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 Kwacha thousands Notes 2018 2017 5 1,141,800 1,008,232 Revenue Cost of sales (565,859) (527,690) Gross profit 575,941 480,542 Selling and distribution expenses Marketing expenses Administration expenses (207,905) (151,297) 6 (8,661) (9,998) Operating profit Investment income Other gains and losses Finance costs 7 (265,122) (252,533) 9 94,253 66,714 PROFIT BEFORE TAX 10 730 Income tax credit ( expense ) 12 1,975 10,126 (2,045) (7,378) PROFIT FOR THE YEAR (2,555) Other comprehensive income 104,309 57,511 Total comprehensive income for the year 90,589 (38,573) Basic and diluted earnings per share with exceptional 13 corporate tax credit) (Kwacha) Basic and diluted earnings per share (from normal results 13 for the year) (Kwacha) 194,898 18,938 194,898 18,938 0.97 0.09 0.37 0.09 2018 2017 STATEMENT OF FINANCIAL POSITION For the year 2018 in thousands 14 1,537,788 Property, plant and equipment Intangible assets Equity Investment at fair value 1,500,523 477 15 515 16 25 126 25,266 Total non-current assets 1,526,356 1,563,429 17 207,590 125,332 164,345 87,752 18.1 Current assets Inventories Trade receivables Other receivables Amounts due from related companies Bank and cash balances Current tax asset 182 99,250 48,442 19 21,517 72,684 72,163 58,319 121,317 21 195 Total current assets 648, 169 452,737 2,174,515 2,016,166 Total assets EQUITY AND LIABILITIES Capital and reserves Issued capital Revaluation reserve Retained earings 21.1 21.2 21.3 10,002 10,002 479,363 1,159,160 502,237 998,990 Total equity 1,648,525 1,511,169 22 Non-current Rabities Provision for environmental abilities Retirement benefit plans Deferred tax liabilities 23 22,536 19,401 258 82 24 299.687 238,432 Total non-current liabilities 282,305 258,091 Current Nobitties Trade payables 25.1 Total current assets 648,169 452,737 Total assets 2,174,535 2,016,166 EQUITY AND LIABILITIES Capital and reserves Issued capital Revaluation reserve Retained earnings 21.1 21.2 21.3 10,002 479,363 10,002 502,237 1,159,160 998,930 Total equity 1,648,525 1,511,169 22 Non-current liabilities Provision for environmental liabilities Retirement benefit plans Deferred tax liabilities 22,536 23 19,401 82 258 24 259,687 238,432 Total non-current liabilities 282,305 258,091 Current liabilities Trade payables Other payables Amounts due to related companies 53,353 25.1 25.2 19 85,497 137,612 121,509 20,596 72,044 Total current liabilities Total liabilities 243,705 246,906 Total equity and liabilities 526,010 504,997 2,174,535 2,016,166 Before submitting the reports for audit the CFO has notice that the following information relating to the construction project of building the bridge which was awarded to Lafarge by the Road Development Agency (RDA) which commenced in 2017 has been omitted in the financial records. The initial price agreed in the contract is K90,000,000. Lafarge's initial estimate of contract costs is K80,000,000. It will take 3 years to build the bridge. By the end of year 2017, Lafarge's estimate of contract costs had increased to K80, 500,000.In year 2018, RDA approved a variation resulting in an increase in contract revenue of K2,000,000 and estimated additional contract costs of K1, 500,000. At the end 2018, costs incurred included K1000, 000 for standard materials stored at the site to be used in the year 2019 to complete the project.Lafarge determines the stage of completion of the contract by using the input method. A summary of the financial data during the construction period is as follows 2017 2018 2019 K,000 K,000 K,000 Initial amount of revenue agreed 90,000 90,000 90,000 Contract Cost incured in the year 20,930 40,750 20,320 The CFO has requested that you deal with this issue so that correct financial statements are submitted for audit Required a) Citing relevant accounting standard explain what type of error has been made by Lafarge and explain how this error will be accounted for in the books (5 marks) b) Prepare all the required journal entries to update the records of Lafarge (show all your working) 15 marks c) Prepare a new Income statement and the statement of financial position after recording the above omitted transaction.(10 marks) d) Discuss the effect that this omission had on the profit before tax for 2018 and the impact that it would have had to the users of financial statement.(10 marks)