1. You are the Financial Consultant for Somo Chartered Accountants Your client Kalale Plc has approached you for advice on the accounting treatment of the following transactions in its financial statements for the year ended 31 March 2019 in accordance with appropriate accounting standards. In addition, Kalale Plc needs to know the criteria that should be met for a financial liability to be carried at amortised cost in its financial statements.

Transaction one

Kalale Plc purchased a piece of plant on 1 April 2016 at a cost of K600,000. On 1 January 2017, the plant was revalued to K507,025. The plant was revalued again to K351,000 on 31 March 2018. Depreciation is charged at an annual rate of 20% on straight line basis while capital allowances are claimed on straight line basis at a rate of 25%.

Kalale Plc wants advice on deferred tax effects of the transaction on its financial statements for the year ended 31 March 2019. Kalale Plc had a deferred tax liability of K18,000 at 31 March 2018. Kalale Plc is taxed at an annual rate of 30%.

Note: Assume that other assets and liabilities had no deferred tax effects in the year to 31 March 2019, the cost of K600,000 was correctly calculated and valuations were done by professional valuers.

Transaction Two

Pola Plc leased out a machine that is used in the manufacture of soft drinks to Kalale Limited. The machine has an economic useful life of five (5) years. The terms of the lease agreement included the following:

(1) The lease will be for a period of three (4) years;

2. Kalale Limited will be required to pay annual rentals of K30,000, K40,000 and K50,000 in the first year, second year and third year respectively;

(3) Lease rentals will be paid in arrears on 31 March of each year.

4. Pola Plc will be responsible for insurance and maintenance of the machine. However, the cost will be borne by Kalale Limited. The lease agreement will come into effect on 1 April 2018;
5. The lease provides Kalale Limited the right to buy the machine at the end of the lease period.
6. The machine was acquired on 31 March 2018 at cost of K700,000 and Polar incurred delivery charges of K100,000.

Kalale Limited incurred initial direct costs of K50,000 of which Pola Plc. reimbursed K10,000 of these costs.

It is Pola Plc policy to depreciate machinery on straight line basis. The implicit interest rate within the lease is not readily determinable, but Kalale Limiteds incremental borrowing rate is 8%.

Required:

1. Advise Kalale Plc on how the above transactions should be treated in its financial statements for the year ended 31 March 2019. (16 marks)

(ii) Explain the criteria that should be met for a financial liability to be recognised at amortised cost in the financial statements of Kalale Plc. (4 marks)

[Total: 40 Marks]