QUESTION TWO

The Chief Executive Officer of your company Keita Limited wants you to explain the accounting treatment of the following transactions following your return from an IFRS workshop on various accounting standards. You are the finance manager of your company.

Transaction One

Keita Limited introduced two pension schemes, CON and BEN on 1 April 2019 for the benefit of its employees. The following information relates to the two schemes as at 1 April 2020:

CON Scheme

Under this scheme the companys obligation is limited to its fixed annual contribution of K600,000. The membership of this pension scheme is senior management staff of the company.

At 1 April 2019, there were contributions paid in advance for the year ending 31 March 2020 amounting to K150,000. In the year ending 31 March 2020, the company made total contribution of K1,040,000 out of which K200,000 related to the year ending 31 March 2021. During the year to 31 March 2021, total contributions of K1,400,000 were made out of which K250,000 were made in advance for the year that followed.

BEN Scheme

Under this scheme, the company guarantees benefits to the employees when they reach 60 years or after working for the company for 30 years whichever comes earlier. The membership of this pension scheme is employees other than senior management staff.

The following relates to the pension scheme: K000

Net plan assets at 1 April 2020 500

Current service cost 2,000

Contributions paid 800

Pension benefits paid 400

Net plan liability at 31 March 2021 200

Appropriate annual discount rate 12%

During the year to 31 March 2021, Keita Limited adjusted the formula used to calculate the benefits payable to employees. This resulted in a decrease of K510,000 in pension benefits payable to employees.

Contributions and pension benefits were all paid at 31 March 2021.

The company has only recorded contributions paid in its financial statements for the year to 31 March 2021.

Required:

Explain how the two schemes, CON and BEN should be treated in the financial statements of Keita Limited for the year to 31 March 2021.

Note: Include all relevant calculations in your explanation. (10 marks)

Transaction two

Keita Limited deals in groceries and hardware products. The company has thus two divisions, groceries division and hardwares division. It was formed six (6) years ago by two Zambians who are the directors of the company. They have been responsible for the day to day running of the business. One of the directors made the following comments: we have not seen the need to disclose the performance of each division. We have only been interested in the overall performance of the company; disclosing the performance of each division is a waste of time and

does not add any value to our financial statements. Further, as far as I am concerned, there are no known criteria for identifying operating segments.

Required:

Discuss the comments made by the director of Keita limited, making reference to appropriate accounting standards. (10 marks)

Transaction three

Keita Plc acquired a piece of machine on 1 June 2019 at a cost of K200,000. This cost is before taking into account trade discount of 5% that Keita Plc received on the same date. On 1 June 2020, the machine was revalued to K159,000.

During the year to 31 May 2021, there was a reduction in the use of the machine because of decline in demand for Keita Plcs products as a consequence of new entrants in the market. This prompted Keita Plc to review the machine for impairment. At 31 May 2021, the machine had a fair value less costs to sell of K86,000. Further, Keita Plc expects the machine to generate net inflows of K45, 000 in each of the last two years of its remaining economic useful life.

Keita Plc has a policy of transferring to retained earnings an amount representing realised revaluation surplus. Machines are depreciated using straight line method at an annual rate of 25%. Keita Plc uses an annual discount rate of 10%.

The machine is recorded in the financial statements of Keita Plc based on 31 May 2020 carrying value of K142,500.

Note: Assume the machine has a nil residual value at the end of its economic useful life.

Required

Write a report to the Chief Executive Officer that explains:

How the above transactions will be treated in the financial statements of Keita Plc for the year ended 31 May 2021. (10 marks)

Note: Include relevant calculations in your explanations.

(Total: 30 marks)