FINANCIAL REPORTING 1- BACT 303

TUTORIAL QUESTIONS
IAS 2-INVENTORIES
QUESTION 1
LBC manufactures mechanical talkative recorder, which trade under the name ‘Talkative’. In the
year ended 31st December 2017, 10,000 Talkatives were manufactured and the related costs
were:
  GH¢
Materials 3,000
Labour 4,000
Depreciation of Machinery 2,000
Factory rates 1,000
Selling expenses 3,000
Expenses at head office 2,000
Abnormal loss 3,000

In addition to the information above, at 31 st December 2017, there were 2,000 Talkatives in
inventory.

Required:
Assuming that these have a resale value of GH¢5 and a Net Realisable Value of GH¢1.15 each,
what value should be placed on the closing inventory?

QUESTION 2
a) State how closing inventory is to be measured according to IAS 2.
b) Using the following information calculate;
(i) The value of closing inventory for each of the Phones (Nokia, Sumsung and Motorola).
(ii) The total value of all the closing inventories (Nokia, Sumsung and Motorola).

Azonto trades in different types of phones on wholesale basis. The following data
was extracted at the end of the year 31st December, 2016.
Nokia Sumsung Motorol
Cost per unit GH¢8 GH¢10 a
GH¢19
Net realisable value per unit GH¢10 GH¢7.9 GH
¢15.6
Selling price per unit in the market GH¢12 GH¢11 GH¢14
Units in inventory 10,000 20,000 30,000

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 IAS 16-PROPERTY, PLANT AND EQUIPMENT
QUESTION 1
Construction of BB block by KK Limited began on 1st April 2016. The following costs were
incurred on the construction:
GH¢
Freehold land 4,500,000
Architect fees 620,000
Site preparation 1,650,000
General overheads 940,000
Price list of Materials purchased 7,800,000
Discount on materials 10%
Direct labour costs 11,200,000
Legal fees 2,400,000
st
KK secured a loan of GH¢25m on 1 April 2016 to finance the construction of the new store
(which meets the definition of a qualifying asset per IAS 23). The loan carried an interest rate
of 8% per annum and is repayable on 1st April 2017.
The block was completed on 1st January 2017 and brought into use following its grand opening
on the 1st April 2017.
Required:
Calculate the amount to be included as property, plant and equipment in respect of the new store
for the year ended 31st March 2017 in accordance with IAS 16

QUESTION 2
Gbormitta Company Limited purchases an asset that had a list price of GH¢100,000 but was
offered a trade discount of 10%. If the company pays for the asset within the next twenty days it
can take advantage of a further 5% settlement discount.
In addition to the list price the company also incurred the following charges:

GH¢
Shipping & handling charges 2,500
Pre-production testing 10,000
Site preparation costs:
electrical cabling costs 10,000
floor reinforcing 5,000
in-house labour costs 7,000 22,000
Included in the electrical cabling costs is GH¢3,000 which is as a result of the company
providing incorrect requirements for the asset.

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The company paid after eighteen days.

Required:
What initial cost should be recorded for the asset in the Statement of Financial Position?

QUESTION 3

On 1st January 2018, CPI Limited paid the Government of Ghana GH¢5,000 for a three-year
licence to quarry gravel. At the end of the licence, CPI Limited must restore the quarry to its
natural state. This will cost a further GH¢3,000. These costs will be incurred on 1st January
2021.CPI’s cost of capital is 10%.

Required:
Show how this expenditure is treated in the statement of profit or loss and statement of financial
position of CPI Limited.

QUESTION 4

On 1 January 2015 Killmequick Brewery Limited (KBL) acquired a new bottling plant under the
following terms:
GH¢
Manufacturer’s base price 4,200,000
Trade discount (applying to base price only) 20%
Settlement discount on the bottling plant 10%
Freight charges 120,000
Electrical installation cost 112,000
Staff training in use of machine 160,000
Pre-production testing 88,000
Purchase of a three-year maintenance contract 240,000
Estimated residual value 80,000

Hectolitres (HL)
Estimated life in hectolitres of beer 24,000
Hectolitres of beer produced - year ended 31 December 2015 4,800
- year ended 31 December 2016 7,200
- year ended 31 December 2017 (see below) 3,400

On 1 January 2017, KBL decided to upgrade the plant by adding new components at a cost of
GH¢800,000. This upgrade led to a reduction in the production time per unit of output and also
improved the quality of the bottling process. The upgrade also increased the estimated remaining
life of the machine at 1 January 2017 to 18,000 HL and its estimated residual value was revised
to GH¢160,000.

Required:
Prepare extracts from the statement of profit or loss and statement of financial position for the
above machine for each of the three years to 31 December 2015, 2016 and 2017.
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QUESTION 5

The Assistant Accountant of your company who is responsible for preparing the final accounts
of the company has encountered some difficulties relating to treatment of some items when
drafting the 2014 final accounts. He has approached you for some guidance. The accounting
year end of QRS Ltd is 31 December.

On 1 January 2014, QRS Company purchased a freehold land and building for GH¢800,000.
(Land: GH¢240,000, Building: GH¢560,000). The building was expected to have economic
useful life of 40 years and depreciation of the land is ignored. On 1 October 2017, the land was,
revalued at GH¢300,000 and the building at GH¢580,000. The original estimated useful life
remains unchanged.

Required:
Show the relevant entries in the Statement of profit or loss for the year ended 31
December 2017 and Statement of Financial Position as at 31 December 2017. (5 marks)

REVALUATION- IAS 16

QUESTION 6
On January 1, Year 1, LBC Limited acquires a building at a cost of GH¢50,000. The building is
expected to have a 25-year life and no residual value. The asset is accounted for under the
revaluation model and revaluations are carried out every three years.
On December 31, Year 3, the fair value of the building is appraised at GH¢45,000.

Required:
Prepare the entries required on December 31, Year 3

QUESTION 7
Joyce Limited purchased land and building on 1 st January, 2012 for GH¢200,000 (land GH
¢60,000 and buildings GH¢140,000). While there is no depreciation on land, however the
company uses 5% reducing balance method on building. On 1st January 2016 the land was
revalued to GH¢75,000 and the buildings to GH¢135,000. Depreciation on buildings is
computed at 4% reducing balance. The financial statements are prepared on a yearly basis.

Required:
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Calculate the revaluation reserve for the year ended 31st December, 2016. (5 marks)

IAS 40-INVESTMENT PROPERTY

QUESTION 8
Investment property is acquired January 11, 2014, at a cost of GH¢200,000.
Fair values on:
December 31, 2014 - GH¢190,000
December 31, 2015 - GH¢ 198,000
December 31, 2016 - GH¢205,000

Required:
Account for how the above transaction should be treated.

QUESTION 9

KK owns the following properties as at 31st December 2018:

Property: Fair value GH¢
Land with future use undetermined 3,200,000
Factory rented to KK’s subsidiary under an operating lease 2,400,000

10 floor office building (fair value is equal per floor)

with 3 floors used as the subsidiary's head office and seven floors
rented to third parties under an operating lease. 15,000,000
Empty building held for capital appreciation, but not leased out. 4,100,000

KK's accounting policy is to hold its investment properties under the fair value model and its
land and buildings under the revaluation model.

Required:
In accordance with IAS 40 Investment Property calculate the carrying amount to be recognized
as investment property in KK's consolidated financial statements as at 31 December 2018.

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