QUESTION TWO Domiciled in Zambia and listed on the Lusaka Securities Exchange, Real Estate Investments Zambia Plc (REIZ) (formerly Farmers House Ple) 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. Page 5 of 8 FIVE YEAR FINANCIAL SUMMARVIKATUAN FIVE YEAR FINANCIAL SUMMARY KWACHA) STATEMENT OF COMPREHENSIVE INCOME - K For the ended 31 December 2019 2018 2017 2016 2015 K000K 100% KOO K 000 % Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 50,570 85,164 75,782 57 201 (8,081) 10% (7.011) 125 (1.147) (11.837) 20% (10,221) 2014 (11,753) 18% (12,114) 10% 0.055) 17% (2.073) 094 71,126) 1% (1,121) 2% (560) 1% (683) 1% (653) 1% 504) 1% 37,847 56% Profit from operations 27.7355% 40.483 02 % 54.870 72% 34,174 SON Other operating income 70 20 00 2.484 26,325 2,154 (01 628) 445.734 Change in fair value of Investment property Net interest expense Exchange (los) gain (10,201) (10,178) (10.440) (11.483) (28 289) 100) 5.415 20.130 9.630 32,413 Profit(loss) before tax (11,893) 444,750 (8.840) Income tax expense Profit loss) after tax (0,815) 2.824 (7.380) 25.033 (11.220) 433.530 19,793 (20.733) 43. STATEMENT OF FINANCIAL POSITION 2012 2018 K000 2017 2016 2013 K000 K000 K'000 Plant and equipment Investment properties Investment property under development 13,608 8.008 081,786 26,043 1,748 838.842 1,041,974 2.304 805,272 24.300 Rental income receivable after 12 months 1,054 864,504 23,102 22.082 Current assets 31,666 6,107 2,073 7.140 7,840 30,438 12.418 00.504 Total Assets 41,771 1,134,123 03.721 77.606 1,020.444 072.401 032.780 076,104 Shareholders' funds and liabilities Total equity Non-current liabilities 708,052 804.202 792.166 127.030 823,615 140.058 Total current liabilities 107.301 30.101 150.053 12.092 10.821 12.230 Total equity and liabilities 1,134,123 1,020.444 072.401 932.780 075.104 Page 6 of 8 Early 2017, REIZ, design and started to construct a complete modemization 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% REIZ will hold this bond till maturity 2 1,000,000 shares of no-par ordinary shares, issued at K10 per share on October 1, 2017 In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K750,000 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 W N Fit to page D Page view A Required a) Citing relevant accounting standarde discuss and explain how the Interest expense during construction would have been accounted for in the financial statement (Bmarka) b) Compute the interest that you think has been expensed by the accountants relating to the construction for the year 2017 and 2018.(8 marka) 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) d) Prepare the new Income statement and the statement of financial position for 2017, 2018 and 2019 after recording the adjustments in (c) above. (10 marks). e) Explain why it's important for accountants to be up to date with the financial accounting standard by, discussing the effect that the above adjustment on the finance costs have on the profit before tax for in 2017, 2018, 2019 and its impact on the shareholders and potential Investors(10 marks) After noticing the above anomaly relating to how the finance cost was recorded, you suspect that may be the issue of the bond on January 1 2017 had some anomaly also, but after checking you discover that it was properly recorded. Prepare all the journal entries that were made by the accountants relating to this bond issue for the year 2017, 2018 and 2019 that have made you to conclude that the bond issue was properly recorded. (12 marks) QUESTION TWO 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. Page 5 of 8 FIVE YEAR FINANCIAL SUMMARY (KWACHA) STATEMENT OF COMPREHENSIVE INCOME-K For the ended 31 December 2019 2018 2017 2016 2015 K 000 % K 1000 "000% K'000 Gross rental income Total property expenses Total administration expenses Impalment loss on trade receivables Total depreciation 50,579 65,164 75,782 57,391 (8,081) 16% (7,611) 129 (7,147) 9% (11,637) 20% (10,231) 20% (11,753) 18% (12,184) 16% 9,955) 17% (3,973) 8% (4,634) 791,128) 1% (1,121) (560) 1% (683) 1% (653) 1% 504) 19 2% 37,847 56% 27,734 35% 40,483 62 % 54,670 72% Profit from operations 34,174 60% Other operating income 70 20 90 2,464 Change in fair value of Investment property 26,325 2,154 (61 628) 445,734 Net interest expense (16,201) (10,178) (10,440) (11,483) (28,289) (66) 5415 Exchange (lossy/gain (26139) 9.639 32,413 (11,893) Profit(loss) before tax 444.750 16.815 (8.840) (11220) Income tax expense Profit loss) after tax (7380) 25 033 19,793 2824 (20.733) 433 530 + Fit to page Page view A' Read aloud STATEMENT OF FINANCIAL POSITION 2019 K '000 2018 2017 2015 2016 K'000 K '000 K'000 K'000 13,605 Plant and equipment Investment properties Investment property under development Rental income receivable after 12 months 8,608 951,785 26,943 1,748 838,842 2,394 805,222 24,309 1,954 864,594 23,102 1,041,974 22,982 31,666 5,107 2,673 7,140 7,849 Current assets 36,435 12.415 96,504 93,721 77,695 Total Assets 41.771 1,134,123 1,026,444 972,491 932,786 975,194 Shareholders' funds and liabilities Total equity Non-current liabilities 798,952 804,202 792,155 127,939 823,615 140,958 156.053 197,301 30,191 12.692 10.621 Total current liabilities 12,236 1,134,123 972,491 975, 194 1,026,444 932,786 Total equity and liabilities 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%. REIZ will hold this bond till maturity 2. 1,000,000 shares of no-par ordinary shares, issued at K10 per share on October 1, 2017 In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K750,000, 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 Fit to page ID Page view A Read ala Prepare all the journal entries that were made by the accountants relating to this bond issue for the year 2017, 2018 and 2019 that have made you to conclude that the bond issue was properly recorded. (12 marks) Page 7 of 8 QUESTION TWO Domiciled in Zambia and listed on the Lusaka Securities Exchange, Real Estate Investments Zambia Plc (REIZ) (formerly Farmers House Ple) 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. Page 5 of 8 FIVE YEAR FINANCIAL SUMMARVIKATUAN FIVE YEAR FINANCIAL SUMMARY KWACHA) STATEMENT OF COMPREHENSIVE INCOME - K For the ended 31 December 2019 2018 2017 2016 2015 K000K 100% KOO K 000 % Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 50,570 85,164 75,782 57 201 (8,081) 10% (7.011) 125 (1.147) (11.837) 20% (10,221) 2014 (11,753) 18% (12,114) 10% 0.055) 17% (2.073) 094 71,126) 1% (1,121) 2% (560) 1% (683) 1% (653) 1% 504) 1% 37,847 56% Profit from operations 27.7355% 40.483 02 % 54.870 72% 34,174 SON Other operating income 70 20 00 2.484 26,325 2,154 (01 628) 445.734 Change in fair value of Investment property Net interest expense Exchange (los) gain (10,201) (10,178) (10.440) (11.483) (28 289) 100) 5.415 20.130 9.630 32,413 Profit(loss) before tax (11,893) 444,750 (8.840) Income tax expense Profit loss) after tax (0,815) 2.824 (7.380) 25.033 (11.220) 433.530 19,793 (20.733) 43. STATEMENT OF FINANCIAL POSITION 2012 2018 K000 2017 2016 2013 K000 K000 K'000 Plant and equipment Investment properties Investment property under development 13,608 8.008 081,786 26,043 1,748 838.842 1,041,974 2.304 805,272 24.300 Rental income receivable after 12 months 1,054 864,504 23,102 22.082 Current assets 31,666 6,107 2,073 7.140 7,840 30,438 12.418 00.504 Total Assets 41,771 1,134,123 03.721 77.606 1,020.444 072.401 032.780 076,104 Shareholders' funds and liabilities Total equity Non-current liabilities 708,052 804.202 792.166 127.030 823,615 140.058 Total current liabilities 107.301 30.101 150.053 12.092 10.821 12.230 Total equity and liabilities 1,134,123 1,020.444 072.401 932.780 075.104 Page 6 of 8 Early 2017, REIZ, design and started to construct a complete modemization 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% REIZ will hold this bond till maturity 2 1,000,000 shares of no-par ordinary shares, issued at K10 per share on October 1, 2017 In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K750,000 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 W N Fit to page D Page view A Required a) Citing relevant accounting standarde discuss and explain how the Interest expense during construction would have been accounted for in the financial statement (Bmarka) b) Compute the interest that you think has been expensed by the accountants relating to the construction for the year 2017 and 2018.(8 marka) 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) d) Prepare the new Income statement and the statement of financial position for 2017, 2018 and 2019 after recording the adjustments in (c) above. (10 marks). e) Explain why it's important for accountants to be up to date with the financial accounting standard by, discussing the effect that the above adjustment on the finance costs have on the profit before tax for in 2017, 2018, 2019 and its impact on the shareholders and potential Investors(10 marks) After noticing the above anomaly relating to how the finance cost was recorded, you suspect that may be the issue of the bond on January 1 2017 had some anomaly also, but after checking you discover that it was properly recorded. Prepare all the journal entries that were made by the accountants relating to this bond issue for the year 2017, 2018 and 2019 that have made you to conclude that the bond issue was properly recorded. (12 marks) QUESTION TWO 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. Page 5 of 8 FIVE YEAR FINANCIAL SUMMARY (KWACHA) STATEMENT OF COMPREHENSIVE INCOME-K For the ended 31 December 2019 2018 2017 2016 2015 K 000 % K 1000 "000% K'000 Gross rental income Total property expenses Total administration expenses Impalment loss on trade receivables Total depreciation 50,579 65,164 75,782 57,391 (8,081) 16% (7,611) 129 (7,147) 9% (11,637) 20% (10,231) 20% (11,753) 18% (12,184) 16% 9,955) 17% (3,973) 8% (4,634) 791,128) 1% (1,121) (560) 1% (683) 1% (653) 1% 504) 19 2% 37,847 56% 27,734 35% 40,483 62 % 54,670 72% Profit from operations 34,174 60% Other operating income 70 20 90 2,464 Change in fair value of Investment property 26,325 2,154 (61 628) 445,734 Net interest expense (16,201) (10,178) (10,440) (11,483) (28,289) (66) 5415 Exchange (lossy/gain (26139) 9.639 32,413 (11,893) Profit(loss) before tax 444.750 16.815 (8.840) (11220) Income tax expense Profit loss) after tax (7380) 25 033 19,793 2824 (20.733) 433 530 + Fit to page Page view A' Read aloud STATEMENT OF FINANCIAL POSITION 2019 K '000 2018 2017 2015 2016 K'000 K '000 K'000 K'000 13,605 Plant and equipment Investment properties Investment property under development Rental income receivable after 12 months 8,608 951,785 26,943 1,748 838,842 2,394 805,222 24,309 1,954 864,594 23,102 1,041,974 22,982 31,666 5,107 2,673 7,140 7,849 Current assets 36,435 12.415 96,504 93,721 77,695 Total Assets 41.771 1,134,123 1,026,444 972,491 932,786 975,194 Shareholders' funds and liabilities Total equity Non-current liabilities 798,952 804,202 792,155 127,939 823,615 140,958 156.053 197,301 30,191 12.692 10.621 Total current liabilities 12,236 1,134,123 972,491 975, 194 1,026,444 932,786 Total equity and liabilities 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%. REIZ will hold this bond till maturity 2. 1,000,000 shares of no-par ordinary shares, issued at K10 per share on October 1, 2017 In addition to the 9% bonds payable, the only debt outstanding during 2017 and 2018 was a K750,000, 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 Fit to page ID Page view A Read ala Prepare all the journal entries that were made by the accountants relating to this bond issue for the year 2017, 2018 and 2019 that have made you to conclude that the bond issue was properly recorded. (12 marks) Page 7 of 8