QUESTION TWO

Kolala Co. is a company in the textile manufacturing industry based on the Copperbelt province of Zambia. You work as Finance Manager for Kolala Co. Directors of the company decided to close down one of the companys divisions due to some difficulties experienced recently with sales going down tremendously.

Below is a trial balance of Kolala Co., as at 31 March 2021.

K000 200,000K000Land at valuation at 1 April 2020 (note i)Buildings at valuation at 1 April 2020 (note i)450,000Plant and machinery at cost Accumulated depreciation of plant & machinery Investment property Revenue (notes iii and v) Cost of sales (notes i and v)110,00039,600160,000876,000254,000Distribution costs (note v)157,400Administrative expenses (note v) Current tax at 1 April 2020 (note iv)214,95027,000Deferred tax at 1 April 2020 (note iv) Inventories at 31 March 202149,00038,000Trade receivables (note ii) Trade payables120,700132,050Bank40,0006% loan note (note viii)160,000K1 ordinary share capital 31 March 2021 Interest paid Share premium at 31 March 2021220,0009,60090,000Revaluation reserve at 1 April 2020 Retained earnings (note ii) Investment income (note vi)56,00020,000_______45,0001,734,6501,734,650

The following information is relevant:

i) Kolala Co. has a policy of revaluating its land and buildings each year-end. The balances in the

above trial balance are as a result of the revaluation exercise at 31 March 2020. At this date, the

buildings economic useful life had not changed which was 40 years at the date of acquisition on

1 April, 2010. Consequently, on 31 March 2021, land and buildings were revalued to K235 million

and K415 million respectively. Kolala Co. does not make an annual transfer to retained earnings

of excess depreciation and there is no deferred tax effect on revaluation surplus.

Of the revaluation surplus of K56 million in the trial balance, K30 million relates to buildings and K26 million relates to land.

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Plant and machinery is depreciated at 20% per annum on the reducing balance basis. All depreciation of items of property, plant and equipment is charged to cost of sales.

ii) Early in April 2021, just before the financial statements were approved, Kolala Co.s directors

discovered a material fraud in which K40 million worth of trade receivables as shown in the trial balance at 31 March 2021 had in fact been paid but cash allegedly stolen by the companys credit control team. K10 million of the stolen cash from receivables relates to the year ending 31 March 2020 and K30 million relates to the year ending 31 March 2021.

iii)Revenue includes K18 million for cash sales made through Kolala Co.s division during the year on behalf of Amaka Ltd. Kolala Co. acting as an agent is entitled to commission of 10% of the sales

value of the goods. At 31 March 2021, Kolala had remitted the difference of K16.2 million to Amaka Co. (included in cost of sales).

iv) The estimated provision for income tax on the profit for the year ended 31 march 2021 is K34.75

million. During the year, the companys taxable temporary differences increased by K120 million. The deferred tax relating to the increase in temporary taxable differences should be taken to profit and loss. The applicable income tax rate is 20%.

v) On 1 January 2021, Kolala Co. closed the Malala Co. division whose results from 1 April 2020 to

date of closure, as included in the above trial balance were:

K000

Revenue57,000Cost of sales44,000Distribution costs17,000Administrative expenses10,500Loss on disposal of divisional Assets2,070

In February 2021, the directors of Kolala Co. re-organized the continuing business at a cost of K2.7 million which has not yet been accounted for. All re-organization costs had been paid by 31 March 2021.

vi)Kolala Co. uses fair value model for its Investment Property and the fair value at 31 March 2021 was estimated to be K147 million.

vii) Kolala Co.s directors declared dividends totaling K7.4 million before the year end which were not

paid by the year end.

viii) The 6% loan note was issued on 1 April 2020 and will be redeemed at a premium in 2023. It has an effective interest of 8%.

Required:

(a)Prepare, for Kolala Co., a statement of profit or loss and other comprehensive income for the year ended 31 March 2021 with strict adherence to requirements of IAS 1 Presentationof financial statements.(12 marks)

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(b) Prepare, for Kolala Co., a statement of financial position as at 31 March 2021.

(8 marks)

[Total: 20 Marks]