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. STATEMENT OF COMPREHENSIVE INCOME - K For the ended 31 December 2019 2018 2017 2016 2015 K '000 % K '000 "000% % K'000 Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 50,579 65,164 75,782 57,391 (8,081) 16% (7.611) 12 (7.147) 9% (11,637) 20% (10,231) 20% (11,753) 18% (12,184) 16% (9,955) 17% (3,973) 8% (4,634) 79(1,128) 1% (1.121) 2% (560) 1% (683) 1% (653) 1% (504) 1% 37,847 56% 27.73 4 55% 40,483 62 % 54,670 72% 34,174 60% Profit from operations 70 Other operating income 20 90 2,46 4 26,325 Change in fair value of Investment property 2.154 (61.628) 445,734 Net interest expense (16,201) (10.178) (10,440) (11.483) (28,289) (66) 5,415 Exchange (loss)/gain (26,139) 9,639 Profit/(loss) before tax 32,413 (11,893) 444,750 (6,815) Income tax expense Profit /(loss) after tax (7.380) 25,033 (8,840) (20,733) (11.220) 433,530 19,793 2,824 STATEMENT OF FINANCIAL POSITION 2019 K 1000 2018 2017 2015 2016 K '000 K'000 K '000 K'000 8,608 1,748 2,394 1,954 13,605 Plant and equipment Investment properties Investment property under development 951,785 838,842 805,222 864,594 1,041,974 26,943 24,309 23,102 22,982 Rental income receivable after 12 months 2,673 7,140 31,666 5,107 7,849 Current assets 12,415 96,504 36,435 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 798,952 804,202 792,155 823,615 Non-current liabilities 127,939 140,958 156,053 Total current liabilities 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 Katue 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 Required a) Citing relevant accounting standards discuss and explain how the interest expense during construction would have been accounted for in the financial statement. (5marks) 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) 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) 1) 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. STATEMENT OF COMPREHENSIVE INCOME - K For the ended 31 December 2019 2018 2017 2016 2015 K '000 % K '000 "000% % K'000 Gross rental income Total property expenses Total administration expenses Impairment loss on trade receivables Total depreciation 50,579 65,164 75,782 57,391 (8,081) 16% (7.611) 12 (7.147) 9% (11,637) 20% (10,231) 20% (11,753) 18% (12,184) 16% (9,955) 17% (3,973) 8% (4,634) 79(1,128) 1% (1.121) 2% (560) 1% (683) 1% (653) 1% (504) 1% 37,847 56% 27.73 4 55% 40,483 62 % 54,670 72% 34,174 60% Profit from operations 70 Other operating income 20 90 2,46 4 26,325 Change in fair value of Investment property 2.154 (61.628) 445,734 Net interest expense (16,201) (10.178) (10,440) (11.483) (28,289) (66) 5,415 Exchange (loss)/gain (26,139) 9,639 Profit/(loss) before tax 32,413 (11,893) 444,750 (6,815) Income tax expense Profit /(loss) after tax (7.380) 25,033 (8,840) (20,733) (11.220) 433,530 19,793 2,824 STATEMENT OF FINANCIAL POSITION 2019 K 1000 2018 2017 2015 2016 K '000 K'000 K '000 K'000 8,608 1,748 2,394 1,954 13,605 Plant and equipment Investment properties Investment property under development 951,785 838,842 805,222 864,594 1,041,974 26,943 24,309 23,102 22,982 Rental income receivable after 12 months 2,673 7,140 31,666 5,107 7,849 Current assets 12,415 96,504 36,435 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 798,952 804,202 792,155 823,615 Non-current liabilities 127,939 140,958 156,053 Total current liabilities 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 Katue 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 Required a) Citing relevant accounting standards discuss and explain how the interest expense during construction would have been accounted for in the financial statement. (5marks) 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) 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) 1) 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)