FA IV As at 23 March 2006

Financial Accounting IV
SUBJECT NO. 16
Revision Kit
STRATHMORE UNIVERSITY
DISTANCE LEARNING CENTRE
P.O. Box 59857,

00200, Nairobi,
KENYA.
Tel: +254 (02) 606155

Fax: +254 (02) 607498
Email: dlc@strathmore.edu
Copyright
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying, and
recording or otherwise without the prior written permission of the copyright owner. This
publication may not be lent, resold, hired or otherwise disposed of by any way of trade without
the prior written consent of the copyright owner.
© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992

ii Acknowledgment
ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the
following bodies: Kenya Accountants and Secretaries National Examination Board
(KASNEB); Chartered Institute of Management Accountants (CIMA); Association of
Chartered Certified Accountants (ACCA).
STRATHMORE UNIVERSITY ● REVISION KIT

Contents iii
Contents
ACKNOWLEDGMENT ................................................................................................... ii
PART I: INTRODUCTION .............................................................................................iv
APPROACH TO EXAMINATION ............................................................................ iv
SYLLABUS ................................................................................................................. vi
TOPICAL GUIDE TO PAST PAPER QUESTIONS ............................................... viii
Part II: Past Papers Questions and Answers ..................................................................... 1
Questions – Past Papers ................................................................................................ 1
Answers – Past Papers ................................................................................................ 93
Part III: Comprehensive Mock Examinations............................................................... 271
Questions - Mocks .................................................................................................... 271
Answers – Mocks ..................................................................................................... 287
FINANCIAL ACCOUNTING IV
iv Introduction
PART I: INTRODUCTION
APPROACH TO EXAMINATION
This revision kit is intended to assist students preparing for CPA III Financial Accounting IV
paper by emphasizing on exam technique and practice. The kit consist of a number of
examination style questions for the Kenya Accountants and Secretaries National Examinations,
from 2000 to 2005. Full-suggested solutions are provided along with question, mock
examination questions and their solutions are also provided.
Ensure that you have covered the syllabus adequately either by the Distance learning centre
study packs or other reference materials. It is very important to maintain a systematic approach
to your studies; right up to your examination whether it is through private study, distance
learning or attending classes, please develop a proper exam strategy.
Students are expected to make themselves well equipped to tackle questions with the new
standards, International Financial Reporting Standards which have already applicable.
The following should be recommended guide.
(i) Start your practice and revision with a topic that you can find straight forward. This
boosts your morale and gives you a bit of self – confidence.
(ii) The kit includes a bank of illustrative questions covering all aspects of the syllabus. Most
of these questions are borrowed from previous examination sittings. Attempt these
questions and you may approach the questions by starting with the syllabus areas you
are comfortable with. Please do not refer to the solutions provided until you have
completed.
(iii) Compare your answers to the suggested solutions provided if your solutions are correct
then well done. If they are not correct then no problem. Check the solution provided
and study carefully how the solution was arrived at.
(iv) Re attempt the question again (may be at a later date) and this time check your speed.
Ensure that your speed is improved and pay attention to formats and presentation, your
solutions should be neat and well laid out
(v) Once the entire syllabus has been revised and you are confident that you can answer
questions successfully, attempt the five mock exams at the end of the kit. Ensure that
you sit the papers under strict exam conditions. It may not be wise to refer to the mock
exams at any time before you are ready to attempt them. Refrain from turning to these
pages until later.
The purpose of practicing the mock exams is for you to gain experience on the method
of selecting questions, deciding on the order in which you will attempt, managing your
time well and producing quality answers. Once you have finished each mock paper and
checking solutions please bear in mind that in addition to the experience gained, please
assess your performance to determine whether you may be having problems in any of
the syllabus areas.
Good Luck!

Approach to Examinations v
EXAMINATION TECHNIQUES
(1) Spend the first few minutes of the examination reading the paper.
(2) Where you have a choice of question, decide which questions you will do
(3) Spend some time to plan how to answer the questions you have chosen.
(4) Divide the time you spend on questions to proportion to the marks on offer
(5) Spend the last five minutes reading through your answers and making any additions or
corrections
(6) If you get completely stuck with a question leave space in your answer book and return
to it later
(7) Stick to the question and tailor your answer to what you are asked. Pay particular
attention to the verbs in the question.
(8) You should do everything you can to make things easy for the marker. The marker will
find it easier to identify the points you have made if your answers are legible.
(9) Computations- it is essential to include all your workings in your answers. Many
computational questions require the use of a standard format e.g. company profit and
loss account, balance sheet and cash flow statement. Be sure you know these formats
thoroughly before the examination.
(10) Reports, memos and other documents. Some questions ask you to present your answer
in the form of a report or a memo or other document. So use the correct format, there
could be easy marks to gain here.
vi Syllabus
SYLLABUS
PAPER NO. 16 FINANCIAL ACCOUNTING IV
OBJECTIVE
To ensure that the candidate has competence in preparing, analyzing and evaluating
financial statements using international standards.
16.0 SPECIFIC OBJECTIVES
A candidate who passes this subject should be able to:
• explain the theory underlying financial accounting

• prepare financial accounts for foreign currency transactions and price level changes
• analyse all financial transactions involving taxation, financial reporting and valuation
of inventory for an organization
• prepare and interpret specialized financial reports
• critically evaluate International Accounting Standards
CONTENT
16.1 The Theoretical Framework of Financial Accounting
- The theory of accounting in relation to measurement of income, capital and the

valuation of assets
- A critical appraisal of accounting principles and conventions
- Users of financial accounting reports and their needs
- Desirable characteristics of good accounting information
- The theoretical and practical issues involved in development of accounting
standards
- A critical appraisal of assumptions underlying the existing accounting standards,
exposure drafts and discussion papers
- Alternatives to accounting standards
16.2 Accounting for Foreign Currency Transactions
- Treatment in the financial statements of individual companies

- Treatment in the consolidated financial statements including foreign subsidiaries
and associates
16.3 Valuation of Assets and Liabilities
- Inventory valuation
- Impairment of assets
- Income taxes
- Borrowing costs
- Retirement benefits
- Leases
- Business shares

Introduction vii
16.4 Accounting for Price Level Changes
- A critical appraisal of the Historical Cost Accounting approach

- Current Purchasing Power method
- Current Cost Accounting method
16.5 Specialised Financial Reporting
- The preparation and presentation of accounts and reports relating to

prospectus, takeovers, mergers, acquisitions, disposals and profit forecasts
- Formulation and accounting for schemes of capital reconstruction and
reorganization
- Segment reporting
16.6 Contemporary Developments in Accounting Practice
a) Extensions of financial reports
- Value added statements

- Employment statements
- Social responsibility accounting
- Cash flow statements
- Earnings per share
b) Environmental statements
- Evaluation of current issues and controversies relating to financial reporting
c) Application of accounting research
viii Topical Guide to Past Paper Questions
TOPICAL GUIDE TO PAST PAPER QUESTIONS

June 2000
QUESTION 1 Earnings Per Share
QUESTION 2 Consolidation (multiple group)
QUESTION 3 Referred Tax
QUESTION 4 Valuation of a firm
QUESTION 5 Segmental reports
July 2000
QUESTION 1 Earnings per share
QUESTION 2 Business combination – vertical structure (Income Statement)
QUESTION 3 Income taxes
QUESTION 4 Share and business valuation
QUESTION 5 Segment reporting.
December 2000
QUESTION 1 Consolidation Profit and Loss and Balance Sheet
QUESTION 2 Government grants
QUESTION 3 Government purchasing power
QUESTION 4 Capital reductions and re-organisation.
QUESTION 5 Property, plant and equipment and impairment.
June 2001
QUESTION 1 Foreign Currency – Foreign entity
QUESTION 2 Related party
QUESTION 4 Foreign Currency (theory) and value added statement
QUESTION 5 Accounting for intangible assets

Introduction ix
December. 2001
QUESTION 2 Group cash flow statement – Acquisition of subsidiary
QUESTION 3 Accounting for price level changes – C.P.P
QUESTION 4 Value added statement
June 2002
QUESTION 1 Business combination – Mixed group structure
QUESTION 2 Pension Accounting
QUESTION 3 Segment reporting
QUESTION 4 Cash flow statement
QUESTION 5 Impairment of Assets and Accounting for price level changes.
December. 2002
QUESTION 2 Accounting for price level changes - CCA
QUESTION 4 Capitals structure & Reorganization - Internal
QUESTION 5 Social responsibility.
June 2003
QUESTION 1 Business combination – Discontinued operations
QUESTION 2 Group cash flow statement – Disposal
QUESTION 3 Accounting for non- Current Assets
QUESTION 5 Theory – Presentation of financial statements, Accounting for

Financial instruments and corporate governance.
December 2003
x Topical Guide to Past Paper Questions
QUESTION 1 Business combination – Merger and acquisition Accounting
QUESTION 2 Segment reporting
QUESTION 3 Accounting for price level changes - CCA
QUESTION 4 Accountants report
QUESTION 5 Employee benefits.
June 2004
QUESTION 2 Accounting for price level changes – CPP
QUESTION 3 Capital structure and reorganization
QUESTION 5 Group cash flow statement.
December 2004
QUESTION 1 Consolidated profit and loss account

Consolidated balance sheet
QUESTION 2 Leases (IAS 17)
QUESTION 3 Reconstruction
QUESTION 4 Accounting for price level changes
QUESTION 5 Valuation of Assets and liabilities leases

Theoretical Framework of financial accounting
Segmental reporting
June 2005
QUESTION 1 Business combination – Mixed group structure
QUESTION 2 Capital structure and reconstruction.
QUESTION 3 Group cash flow statement – Disposal
QUESTION 4 Valuation of shares
QUESTION 5 Theory-conceptual accounting framework

Environmental reporting and accounting
Corporate social responsibility

Introduction xi
DECEMBER 2005
QUESTION 1 Consolidation: foreign subsidiary
QUESTION 2 Current cost accounting
QUESTION 3 Accountants report in a prospectus
QUESTION 4 Consolidated cash flow statement
QUESTION 5 Value added duel segmental reports
No. of times it has appeared

1. Business combination 9
2. Cash flow statement 7
3. Foreign Currency 7
4. Accounting for price level changes 7
5. Income tax 6
6. Earnings per share 3
7. Capital structure & reorganization 5
8. Share & business valuation 23
9. Borrowing costs 1
10. Contract Accounts 1
11. Accounting for non – current Assets 4
12. Accounting for government grants 1
13. Value added statement 2
14. Impairment 1
15. Pension Accounting 2
16. Segment reporting 4
17 Social responsibility accounting 1
Past Papers Questions and Answers 1
Part II: Past Papers Questions and Answers
Questions – Past Papers

KENYA ACCOUNTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
CPA PART III
JULY 2000. Time Allowed: 3 hours
Answer ALL questions. Marks allocated to each question are shown at the end of the
question. Show ALL your workings
QUESTION ONE
Hisa Company Ltd. was incorporated in 1988 with an issued share capital of 2,500,000 ordinary
shares of Sh.10 each and 1,000,000 8% cumulative participating preference shares of Sh.10 each.
All the shares were paid for in full.
In 1992, the company issued 2,500 10% debentures of Sh.1000 each. The terms of issue stipulate
that each debenture is convertible into 75 ordinary shares of Sh.10 each on 31 December 2003
and those not converted will be redeemed at par on 31 December 2008.
On 1 March 1998, the company granted its directors options to take up 500,000 ordinary shares
at a price of Sh.12 per share.
On 1 April 1999, the ordinary shares were split into shares of Sh.2.50 each and on 1 December
1999 a further 3,000,000 ordinary shares were issued at fair value to satisfy the purchase of
certain business rights acquired.
On 2 December 1999, 200,000 of the above options were taken up when the fair value of the
shares was Sh.6 each. The average fair value of the shares during the year was, Sh.5 each. The
following information has been extracted from the consolidated income statements for the years
ended 31 March 1999 and 31 March 2000.

2 Questions – Past Papers
2000 1999
Sh. ‘000’ Sh. ‘000’
Net operating income 19,800 18,410
Income from investments 420 360
Net income before taxation and extraordinary items 20,220 18,770
Taxation (7,630) (6,920)
Net income after taxation 12,590 11,850
Less: Minority interest (1,270) (1,440)
Profit attributable to members of the group 11,320 10,410
Extraordinary items (2,000) (1,500)
Profit after tax and extraordinary items 9,320 8,910
Dividends (Note 1) (4,000) (3,200)
Retained profits for the year 5,320 5,710
Retained profit brought forward 18,530 12,820
Retained profit carried forward 23,850 18,530
Note
Dividends paid 31 March:
On ordinary shares 3,200 2,400
On preference shares 800 800
4,000 3,200
Required:
(a) Calculate the basic earnings per share figure to be disclosed in the published accounts of
Hisa Company Ltd. for the years ended 31 March 1999 and 31 March 2000. (12 marks)
(b) Calculate the diluted earnings per share figure to be disclosed in the published accounts of
Hisa Company Ltd. for the year ended 31 March 2000. Assume a tax rate of 32.5%
(10 marks)
(c) Discuss the usefulness of the earnings per share figure. (3 marks)
(Total: 25 marks)
QUESTION TWO
Mifupa Ltd. offered to acquire 75% of the issued share capital of Nyama ltd. on 1 April 1999.
The offer became final on 1 May 1999. The total coat of acquisition was Sh.177,000,000. The net
assets of Nyama Ltd. as at 1 April 1999 and 1 May 1999 were Sh.130,590,000 and
Sh.137,560,000 respectively.
Mifupa Ltd. had acquired 25% of Mshipa Ltd. many years ago. On 1 September 1999 it acquired
the remainder of the share capital, the consideration of which was Sh.112,000,000. The net
assets of Mshipa Ltd. as at that date was Sh.74,000,000. Mshipa Ltd. on 2 September 1999
acquired 40% of Ngozi Ltd. The consideration paid was Sh.28,980,000. The net assets of Ngozi
Ltd. as at 1 January 1999 were Sh.55,500,000.
The income statements of the four companies for the year ended 31 December 1999 were as
follows:
Mifupa Ltd. Nyama Ltd. Mshipa Ltd. Ngozi Ltd.

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Turnover 3,237,840 687,760 136,800 102,600
Cost of sales 2,238,624 489,312 92,160 69,120
Gross profit 999,216 198,448 44,640 33,480
Expenses 248,736 54,368 10,240 7,680
Operating profit 750,480 144,080 34,400 25,800
Dividend income 1,440 - - -
Interest income 4,800 2,000 - -
Profit before tax 756,720 146,080 34,400 25,800
Taxation 269,600 61,000 15,600 11,700
Profit after taxation 487,120 85,080 18,800 14,100
Dividends
Ordinary
Interim (22,000) (960) (480) (270)
Final (2,000) (480) (240) (270)
Preference (480) - - -
Retained profit for the year 462,640 83,640 18,080 13,560
Additional information:
1. Interim dividends were paid by all companies on 1 July 1999.
2. Nyama Ltd. had sold to Mifupa Ltd. in the post-acquisition period, machinery at Sh.
1,260,000. The machinery had coat Nyama Ltd. Sh.1,500,000 on 1 January 1997. It is the
group’s policy to provide a full year’s depreciation on machinery at the rate of 10% on
cost in the year of purchase but not in the year of sale, and to carry group assets at their
original cost to any number of the group. Any gain or loss on the sale of machinery was
adjusted against expenses.
3. Profits are to be assumed to have accrued evenly throughout the year.
Required:
The consolidated income statement of the Mifupa group for the year ended 31 December 1999.
A reconciliation schedule is required. (Total: 20 marks)
QUESTION THREE
(a) IAS 12 (revised) “Income Taxes” requires an enterprise to provide for deferred tax in full
for all deferred tax liabilities with only limited expectations. The original IAS 12, and the
equivalent Kenyan Accounting Standard, allowed an enterprise not to recognize deferred
tax assets and liabilities where there was reasonable evidence that timing differences would
not reverse for some considerable period ahead; this was known as the partial provision
method.
The original IAS 12 did not refer explicitly to fair value adjustments made on a business
combination and did not require an enterprise to recognize a deferred tax liability in
respect of asset revaluations. The revised IAS 12 now requires deferred tax adjustments
for these items and classifies them as temporary differences.
Required:
(i)Explain why the IASC decided to require recognition of the deferred tax liability for all
temporary differences (with certain exceptions) rather than allowing the partial
provision method. (5 marks)

(ii) Discuss the reasons why IAS 12 (revised) requires enterprises to provide for
deferred taxation on revaluations of assets and fair value adjustments on business
combination. (5 marks)
(b) K Limited has the following balance sheet and tax bases at 30 June 2000, before providing
for any deferred tax in the year to 30 June 2000.
Carrying values Tax bases

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Non-current assets
Buildings (Factory) 100,500 22,500
Plant and equipment 156,000 39,000
Investment in M Ltd.: cost 1,977 1,977
Long-term quoted investments 198,000 198,000
456,477
Current Assets 45,000 45,000
Current liabilities.
Trade payables (40,500) (40,500)
Provision for repairs (900) (Nil)
(41,400) 3,600
460,077
Capital and reserves.
Equity capital 30,000 30,000
Revaluation reserve 73,500 -
Retained profit 298,047 -
Shareholders’ funds 401,547
Non-current liabilities
Long-term loan 30,000 33,000
Deferred tax (bal. b/l) 27,030 27,030
57,030
Deferred income:
Grant from World Bank 1,500
460,077
1. K Limited acquired 100% of the ordinary share capital of M limited on 30 June 2000. The
net assets of M limited as on this day were as follows:
Fair value Carrying value Tax value

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Buildings (Factory) 1,500 900 300
Plant and equipment 120 90 45
Inventory 372 342 342
Trade receivables 330 330 330
Current liabilities (495) (495) (315)
1,827 1,167 702
M limited does not carry a deferred tax liability in its accounts.
2. K Limited’s director decided to revalue K Limited’s buildings at Sh.150 million and the
plant and equipment to Sh.180 million, investments were not to be revalued. K Limited’s
buildings had cost Sh.135 million and the plant and machinery Sh.210 million.
3. The tax rate had changed from 35% to 30% in the current year.
4. During the year, the directors agreed to provide Sh.900,000 for future repairs to the
buildings. The expense is allowable for tax when it is paid.
5. The grant from the World Bank is included as deferred income in the balance sheet and is
not taxable.
6. Goodwill arising on acquisition is not an allowable expense for tax purposes. Since the
subsidiary was acquired on 30 June 2000, no amortisation has been charged in the
financial statements.
7. K Limited raised a long-term loan of Sh.33,000,000 during the year and recorded it net of
transaction costs. The transaction costs of Sh.3,000,000 are allowable for tax in the year
ended 30 June 2000.
Required:
Calculate the deferred tax expense for K Limited which would appear in the group financial
statements under IAS 12 (revised) “Income Taxes” for the year ended 30 June 2000. (10 marks)
(Total: 20 marks)
QUESTION FOUR
Mr. Eama wishes to sell his minority shareholding of 3,000 Sh.10 shares in Zebra Crafts limited.
Zebra Crafts Limited is a private company with an issued share capital of Sh.1,500,000.
The current shareholders and their shareholdings are as follows:
Shareholder Shareholding (shares)

Mr. Athmany 73,500
Ms. Boiyon 36,000
Mr. Chewe 24,000
Ms. Daule 13,500
Mr. Eama 3,000
The income statements for the five years to 30 June 2000 are as follows:
Year ended 30 1996 1997 1998 1999 2000
September Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Sales 47,880 50,400 67,200 101,640 140,400
Cost of sales (20,805) (21,900) (35,040) (62,460) (93,720)
Gross profit 27,075 28,500 32,160 39,180 46,680
Administration expenses (10,260) (10,800) (12,000) (14,400) (16,800)
Distribution costs (15,330) (16,140) (18,000) (21,600) (25,200)
Operating profit 1,485 1,560 2,160 3,180 4,680
Taxation (456) (480) (720) (1,080) (1,630)
Profit after tax 1,029 1,080 1,440 2,100 3,050
Ordinary dividend (250) (270) (288) (300) (315)
Retained profit 779 810 1,152 1,800 2,735
The gross dividend yield on quoted companies operating in the same business sector is 12%.
You are advised that this yield should be increased to 18% to allow for lack of marketability.
The rate of corporation tax should be taken to be 30% through the period being considered.
Required:
(a) Discuss the relevance of dividends in the valuation of Mr. Eama’s shareholding. Illustrate
your answer from the data given. (5 marks)

(b) Explain the factors you would take into account when estimating the future dividends and
when estimating the investor’s required yield. (5 marks)
(c) Explain how your approach when valuing a minority interest could be influenced by the
size of the shareholding, or the fact that the owner is a party related to other significant
shareholders. (5 marks)
QUESTION FIVE
Legion Air Limited is a company incorporated in Kenya which operates throughout East,
Central and Southern Africa. It is in the process of making an Initial Public Offering of its shares
in the Nairobi Stock exchange.
The following information is provided:

1. The main revenue-earning asset is a fleet of Aircraft, each of which is registered in Kenya,
and its other main source of revenue comes from the sale of holidays in the coastal region
of Kenya. The directors are unsure as to how to identify business and geographical
segments
2. The company also owns an aircraft maintenance subsidiary which carries out maintenance
to its aircraft and third parties. Routine maintenance is charged by subsidiary at market
price. However, for specialized work, since there is often no equivalent market price, the
companies negotiate a price for the work.
3. The company has incurred an exceptional loss on the sale of several aircraft to the
government of the Democratic republic of Congo. The loss occurred due to a fixed price
contract which had been signed several years ago for the sale of second hand aircraft; the
contract was denominated in the currency of the Congo: the Congo currency had fallen in
value substantially against the Kenya shilling.
4. In the year under consideration, the company decided to discontinue its holiday business
due to competition in this sector. This plan had been approved by the board of directors
and announced in the press.
5. The company owns 40% of the ordinary shares of Tanzania Tours Limited, an unquoted
company incorporated in Tanzania, which specializes in flying tourists to game parks in
Tanzania from Arusha and Dar-es-salaam. The investment is accounted for using the
equity method of accounting and it is proposed to exclude the company’s results and
financial position from segment revenue and assets.
Required:
(a) Explain why the information content of financial statements is improved by the inclusion
of segmental information on individual business segments (5 marks)
(b) Discuss the implications of each of the above points for the determination of the
segmental information required to be prepared and disclosed under IAS 14 (Revised)
“Segment Reporting” and other relevant International Accounting Standards. (15 marks)
(Total: 20 marks)
CPA PART III
DECEMBER 2000. Time Allowed: 3 hours
QUESTION ONE
The following summarized accounts relate to three private companies C Ltd., S Ltd, and P Ltd.
as at 30 June 2000
Summarized balance sheets C Ltd. S Ltd. P Ltd.

as at 30 June 2000 Sh, ‘000’ Sh, ‘000’ Sh, ‘000’
Goodwill - - 3,200
Tangible fixed assets 53,500 38,500 23,600
Investments 39,600 1,200 -
Intercompany loans 2,000 - (2,000)
Net current assets (liabilities) 18,600 34,860 (12,400)
Loans’ from third parties (10,000) - -
103,700 74,560 12,400
Ordinary shares of Sh.20 each 60,000 20,000 8,000
Preference shares of Sh.20 each 20,000 24,000 -
Reserves 23,700 30,560 4,400
103,700 74,560 12,400
Summarized profit and loss accounts for the year ended 30 June 2000
C Ltd. S Ltd. P Ltd.
Sh, ‘000’ Sh, ‘000’ Sh, ‘000’
Profit after taxation 12,000 7,200 4,000
Extraordinary items (2,000) 800 -
10,000 8,000 4,000
Preference dividends – paid (600) (600) -
- payable (600) (600) -
Ordinary dividends - Paid (2,000) (1,200) (800)
- proposed (4,000) (1,600) (1,600)
Retained for the year 2,800 4,000 1,600

Reserves brought forward 20,900 26,560 2,800
Reserves carried forward 23,700 30,560 4,400
The following additional information is available:

1. All shares are fully paid. Preference shares carry a vote only when their dividends are in
arrears. The preference dividends are payable on 1 January and one fully each year.
2. The investments comprise:

Cost
C Ltd. Sh. ‘000’
900,000 ordinary shares in S Ltd. 30,000
400,000 preference shares in S Ltd. 8,000
46,000 ordinary shares in P Ltd. 1,600
39,600
S Ltd.
60,000 ordinary shares in P Ltd. 1,200
C Ltd. exercises a significant influence over S Ltd and P Ltd.
3. When C Ltd. acquired its investments in S LTD. and P Ltd. during 1997, those companies
had reserves of Sh.8,000,000 and Sh.2,000,000 respectively. S Ltd. acquired its holding on
the incorporation of P Ltd. in 1994, Fair values should be assumed to be balance sheet
values in 1996 other than for S Ltd.
4. The summarized profit and loss accounts include only those dividends which have been
received. No accruals or provisions which may be required have been made for dividends
receivable.
Required:
A summarized consolidated balance sheet as at 30 June 2000 and summarized profit and loss
account for the year ended 30 June 2000 showing clearly consolidation adjustments, movement
in reserves, minority interests and the carrying value of investments.
QUESTION TWO
Kenya Fisheries Limited (KFL) erected a fish processing factory complex in early 1995 in
Lodwar to process Nile perch caught in Lake Turkana. The factory complex had cost Sh.200
million and has a useful life of 20 years. The food and Agricultural Organisation (FAO) of the
United Nations had provided a grant of Sh.100 millions towards the cost of the complex. When
operations commenced on 1 July 1995. FAO paid a further Sh.80 million towards electricity cost
for the first 10 years’ operation of the factory. The only condition attached to these grants was
that the factory output would be exported using empty return flights which brought relief
supplies for southern Sudan into Lokichogio. If at any time during the first 10 years of operation
of the factory the output was not exported, part of the grant would become repayable to FAO,
in the proportion of the number of years the condition would not be fulfilled, plus two penalty
years, to the period of 10 Years. The output of the processed fish was picked up at Lodwar
airport, which was expanded at a cost of Sh.20 million, met by the Kenya government, to
accommodate the large Hercules C130 transport aircraft. The factory became operational on 1
July 1995 and was considered by FAO as a model project. The fish was exported profitably to
Europe. In early January 1999, the European Union (EU) announced that the importation of
fish would be banned forthwith; KFL commenced negotiations with EU officials who allowed
imports of fish to continue until 30 June 2000, pending the outcome of tests to be carried out at
the factory. In the meantime, KFL carried out market research to locate alternative export
markets: this proved to be fruitless, but with effect from early July 2000, KFL ceased exports
and concentrated on selling to the Kenya market, which it did with a high degree of success,
KFL had protracted negotiations with FAO and pleaded that “force majeure” had caused non
compliance with the condition: this fell on deaf ears, and KFL refunded the amounts due on 30
April 2000. KFL’s electricity costs were Sh.9 million and Sh.11 million in the years ended 30
June 2000, respectively.
Required:
(a) State the two broad approaches to the accounting treatment of government grants and
the arguments in support of each of them.
(b) How should a government grant that becomes receivable as compensation for losses
already incurred or for the purpose of giving immediate financial support to the
enterprise with no future related costs be recognized under IAS 20? (2 marks)
(c) KFL had adopted the accounting policy of presenting all governments grants as a credit
in the income statement as a single, separate item. You are required to show extracts
from the balance Sheets as at 30 June 1999 and as at 30 June 2000, and from the
Income Statements to these two dates, to deal with all the facts stated above, showing
the figures that would appear in KFL’s financial statements but also showing the figures
that would have appeared if KFL had adopted the alternative accounting policy. When
the 1999 financial statements were approved by the directors on 25 July 1999, they were
confident that exports would be able to be resumed in the near future. The
requirements of IAS 37: “provisions. . Contingent Liabilities and Contingent Assets”
should be ignored in relation to the year ended 30 June 1999. (11 marks)
(Total: 20 marks)
QUESTION THREE
Zetoxide Limited is a small chemical manufacturing company which supplies Zinc oxide to a
number of major manufacturers in the rubber industry in the East Africa region. It operates a
single production line in rented premises situated in the industrial area of Nairobi. On 1 April
2000, it took advantages of falling rents in Nairobi to move into spacious premises at the same
rent as it was paying previously. On the same date, it sold its previous production line to a
competitor and purchased a new cost-efficient production line that could be operated
independently of electricity. The historic cost balance sheets as at 30 September 1999 and 2000
and the historic cost income statement for the year ended 30 September 2000 are as follows:

Balance sheets as at 30 September Income Statement for the year

ended
30 September 2000
1999 2000 Sh. Sh.
Sh. ‘000’ Sh. ‘000’ ‘000’ ‘000”
Property, plant and equipment
Production plant: Cost 6,000 16,000 Sales revenue 96,000
(4,200) (800) Raw materials (49,000)
Depreciation
1,800 15,200 Changes in 2,100
inventory
Current assets: Inventory 7,200 5,100 (46,900)
Trade receivables 6,300 8,000 Staff costs (36,600)
Cash at bank 1,200 - Depreciation (800)
14,700 13,100 Other operating (7,600)
expenses
Current liabilities: Bank - 900 (91,900)
overdraft
Trade payables 2,900 4,200 Profit from 4,100
operations
Current tax 2,300 - Profit on sale of 2,100
plant
5,200 5,100 Finance costs (300)
Net current assets 9,500 8,000 5,900
11,300 23,200 Taxation: current Nil
Ordinary share capital Deferred (2,300)
200,000 ordinary shares of 2,000 2,000 (2,300)
Sh.10
Retained earnings 8,400 12,000 Net profit 3,600
retained
Shareholders’ funds 10,400 14,000
Non-current liabilities:
Deferred tax 900 3,200
Debentures 6,000
900 9,200
11,300 23,200
1. The directors of the company produce current cost accounts each year in addition to
the historic cost accounts
2. Sales, purchases and expenses have occurred evenly over the year.
3. Opening stock represents two months’ purchases: closing stock represents one month’s
purchases.
4. Debtors and creditors at each balance sheet date represent one month’s sales and
purchases.
5. Zetoxide Ltd. depreciates property, plant and equipment, both for historic cost and
current cost purposes, from the date of purchase of the asset pro-rata with time at 10%
per annum: no depreciation is charged in the year of sale. The old plant sold on 1 April
2000 had been purchased on 1 October 1992.
6. The following price indices are appropriate:
Old Plant New Plant Stock

Debtors
Creditors
1 October 1992 120 - -
1 August 1999 238 - 360
1 September 1999 239 - 363
1 October 1999 240 - 366
1 April 2000 264 250 384
1 August 2000 - 267 395
1 September 2000 - 271 398
1 October 2000 - 275 402
Average for year ended 30
September 2000 - - 384
7. Zetoxide Ltd. bases its current cost depreciation charge on the year end value of
property, plant and equipment. Any current cost profit or loss on disposal is based on
the depreciated current cost at the date of disposal. The cost of sales adjustment and the
monetary working capital adjustment are both computed on the averaging method. No
part of the bank balance or bank overdraft should be included in monetary working
capital. The gearing adjustment is always computed on the simple arithmetic average
gearing for the year.
8. Zetoxide Ltd.’s current cost reserves as at 30 September 1999 was Sh.3,680,000
Required:
Zetoxide Limited’s Current Cost Profit and loss Account (starting with the historic cost profit
before finance costs) for the year ended 30 September 2000, its current Cost Balance Sheet as at
30 September 2000 and the reconciliation of the Current Cost Reserve for the year ended 30
September 2000. Round all figures to nearest Sh.000. (Total: 20 marks)
QUESTION FOUR
Beta Ltd. has been suffering from adverse trading conditions largely due to the effect of
obsolescence on its product. This has resulted in losses in each of the last five years. The
company is unable to secure an extension of its present overdraft and creditors are pressing for
payment.
The directors feel that a new product just developed by the company will make it profitable in
the future but they are worried that a winding up order may be made before this can be
achieved.

The following is the balance sheet as at 31 October 2000.
Book values Present

Fixed assets Sh. Sh. Sh. values
Sh.
Goodwill 600,000 -
Patents, trademarks etc 220,000 40,000
820,000
Freehold land and buildings 2,400, 000 3,000,000
Plant and vehicles 1,000,000 3,400,000 720,000
4,220,000
Current assets
Stock and debtors 1,280,000 1,160,000
Listed shares at cost 300,000 280,000
1,580,000
Creditors falling due within
one year
Trade (2,360,000)
Overdraft (620,000) (2,980,000)
Net current liabilities (1,400,000)
Total assets 2,820,000
Share capital and reserves

Called up share capital
Sh.20.7% cum preference shares
Fully paid (dividends are 3 years 1,000,000 1,000,000
in arrears)
Ordinary shares of Sh.20 each 4,000,000 4,000,000
fully paid
Shares premium account 1,200,000 1,200,000
12% mortgage loan secured on 1,200,000 1,200,000
freehold land
Profit and loss account (4,580,000) (4,580,000)
2,820,000
The following additional information is available:

1. Scheme costs are estimated at Sh.96,000.
2. Preference shares rank in priority to ordinary shares in the event of winding up
3. The bank had indicated that they would advance a loan of up to Sh.1,000,000 provided
that the overdraft is cleared and a second mortgage on the freehold land is given.
4. To ensure speedy production of the new product. it would be necessary to expend
Sh.400,000 on new plant and Sh.300,000 on increasing stocks.
5. The creditors figure of Sh.2,360,000 includes Sh.380,000 that would be preferential in a
liquidation.
Required:
(a) Suggest a scheme of capital reduction and write up the capital reduction account
(12 marks)
(b) Outline suggestions as to the action that should be taken by the directors to improve the
liquidity of the company, (8 marks)
(Total: 20 marks)
QUESTION FIVE
(a) IAS 16: property, plant and equipment gives certain criteria to be satisfied before an item
of property, plant and equipment should be recognized as an asset. State these criteria and
state the value at which the asset should be measured initially. Give six examples of
directly attributable costs that could be included in the value and four examples of cost
that should not be included in the value. (10 marks)
(b) Chumuki Supermarket Limited is a quoted company which runs 22 Supermarket stores
throughout Kenya. 12 of these stores are situated in and around Nairobi and all 12 are
supplied by Chumuki’s central godown situated in the industrial area of Nairobi. Pricing,
marketing and human resources policies are decided centrally by Chumuki. All stores are
managed in the same way and management run the business on a store-by-store profit
basis.
Recently, the Githurai store has seriously underperformed against its budget for the year
ending 31 December 2000. Rising insecurity in the area together with difficulties in
obtaining access to the store have seriously adversely affected its financial performance.
The Githurai store together with the Kahawa store were purchased from Ruiru
Superstores on 1 January 1998 for Sh.25 million and Sh.25 million and Sh.15 million
respectively plus goodwill of Sh.8 million for both stores. The stores are being depreciated
on the straight line method to nil residual value over 20 years the goodwill is being
amortised to nil on the straight line basis over the same period. The Githurai store could
be sold for Sh.15 million net. Its value in use is Sh.20 million. Management have
performed a “bottom-up” test in relation to the goodwill and the purchase prices of the
stores and are satisfied that a “top-down” test is not needed.
Required:
(a) State in detail how the impairment loss should be recognized for the Githurai cash-
generating unit in the financial Statements for the year ending 31 December 2000: neither
depreciation nor amortisation has yet been charged for this period. State also the carrying
value of the Githurai cash-generating unit after the impairment loss has been recognized.
Ignore deferred tax. (10 marks)
(Total: 20 marks)

CPA PART III
JUNE 2001. Time Allowed: 3 hours
QUESTION ONE
Kenphone Limited (KL) was established on 1 October 1997 to trade in the newly liberated
telephone market in Kenya. Because of the delay in obtaining the necessary licenses, the
company moved into Internet Service Provider market and in addition bought 80% ordinary
share capital of Tanzania Cellphones Limited (TCL) on 1 January 1999 when the balance on the
profit and loss account of TCL was Tsh.1,350 million. TCL has not issued any additional share
capital since 1 January 1999. The draft financial statement of KL and TCL for the year ended 30
September 2000 are as follows.
Income statements for the year ended 30 September 2000

KI TCL
KSh. million Tsh. million
Sales 3,112 16,224
Cost of sales (1,867) (11,024)
Gross profit 1,245 5,200
Distribution costs (423) 11,872
Administrative expenses (369) 11,248
Loss on exchange (21) -
(813) 3,120
Opening profit 432 2,080
Finance costs: Interest on loan (9) (120)
Dividend received 8 -
Net profit before tax 431 1,960
Taxation (126) (585)
Profit and tax 305 1,375
Dividends: Interim paid (60) (130)
Final proposed (100) (240)
(160) (370)
145 1,005
293 1,820
438 2,825
Balance sheet as at 30 September 2000

KL TCL
Ksh. million Tsh. million
Property, plant and equipment (NBV) 418 4,241
Investment in subsidiary 220 ___-
638 4,241
Current assets:
Inventories 153 852
Trade and other receivables 239 1,248
Cash 78 192
470 2,292
Current liabilities:
Trade and other payables (143) (828)
Current tax liabilities (11) (48)
Proposed dividend (gross) (100) (240)
(254) (1,116)
Net current assets 216 1,176
854 5,417
Share capital: Authorised
Issued and fully paid
20m/90m ordinary shares of Sh. 10 200 900
Share premium account 50 300
Exchange reserve (9) -
Retained earnings 438 2,825
Shareholders fund 679 4,025
Non-current liabilities: - ___-
Deferred tax 25 192
Long-term loan 150 1,200
175 1,392
854 5,417
1. The fair value of the identifiable net assets of TCL was Tsh.3,000 million at 1 January
1999. Goodwill on consolidation is to be amortised on the straight line basis over 6 with
a full year’s charge in the year acquisition. TCL is a foreign entity. The increase in the
fair value of TCL over book value is attributable to property, plant and equipment
which is depreciated over 6 years on the straight line basis (again bargain with a full
year’s charge in the year of acquisition). The fair value adjustment was not incorporated
into the books of TCL.
Goodwill arising on the acquisition and any fair value adjustments to the carrying
amount of assets and liabilities arising on the acquisition are treated as assets and
liabilities of the reporting entity which are already expressed in the reporting currency.
Depreciation of property, plant and equipment is classified as an administrative expense.
Amortisation of goodwill should be shown as a separate line item.
2. TCL paid the interim dividend on 31 March 2000 and interest on its long term loan on
30 September 2000. The board of directors of both companies proposed the final
dividends indicated at Board meeting which were both held on 29 September 2000.
3. In order to hedge its investment on TCL, KL borrowed Tsh.1,800 million in Tanzania
on 1 January 1999. The rate of interest on loan is 6% per annum and is payable in a
single amount on 30 September each year. The exchange loss on this loan for the period
ended 30 September 1999 had been classified as equity. The exchange loss for the year

ended 30 September 2000 has been charged against KL’s profit for the year. The overall
loss should be accounted for in accordance with IAS 21 and IAS 39. The loan has been
determined as an affective hedge.
4. The following charge rates are relevant.
1 January 1999 Ksh.1 = Tsh. 15

1 October 1999 Ksh.1 = Tsh. 14
1 April 2000 Ksh.1 = Tsh. 13
30 September 2000 Ksh.1 = Tsh. 12
weighed average for year to
30 September 2000 Ksh.1 = Tsh. 13
5. It can be assumed that transactions in the subsidiary took place evenly over the year,
except where indicated above.
Required:
(a). The consolidated income statement for the year ended 30 September 2000 (14 marks)
(b). The consolidated balance sheet as at 30 September 2000 (11 marks)
(Total: 25 marks)
Note:
(i). Do not prepare the consolidated statement of changes in equity.
(ii). Include all dividends in the income statement and show within the income statement
the retained profit carried forward.
(iii). Do not show reconciliation of net exchange differences classified as equity. Round all
figures to the nearest Ksh. million.
QUESTION TWO
Tourists Paradise Limited, TPL is a company quoted on the Nairobi Stock exchange. Its
managing directors, Mr. Tamiba, owns 52% of the share capital of the company. Mr. Tamiba is a
director of Tourists Travels Limited (TTL), an 80% subsidiary of Tourists Paradise Limited, of
Mombasa Deep-sea Fishing Limited (MDFL), a 40% associate of Tourists Paradise Limited, and
of Mombasa Hotel Supplies Limited (MHSL). TPL owns and runs 6 tourist hotels along the
coast, both north and South of Mombasa. TTL is a travel and transport company. All TPL’s
travel and transport needs are outsourced to TTL, MDFL, markets a wide variety of fish
products parts of its output is exported and the rest is sold to a large number of hotels and
restaurants both in the coastal region and inland. MHSL supplies many hotels in the coast
region with an assortment of different products. Mr. Tamiba owns 40% of the share capital of
MHSL, his wife owns 20%, the owners of the 4 other hotels in the coastal region each own 10%
of the ordinary share capital. In addition to being a director of these companies, Mr. Tamiba is a
director of Bamburi Cement Limited (BCL) from which company all the other companies
named above buy cement at the normal market price. All 5 companies prepare their annual
financial statements to 30 November each year.
Transactions between the companies in the year ended 30 November 2000 are as follows
Purchaser Seller Amount Basis of price charged Outstanding at

30 November
2000
TPL TTL Sh.38 million Comparable uncontrolled price Sh.4 million
TPL MDFL Sh.32 million Cost plus 100% other consumers
are charged cost plus 80% Sh.3 million
TPL MHSL Sh.49 million Comparable uncontrolled price
Plus 10% Sh.5 million
TPL BCL Sh.2 million Normal market price Sh.2 million
MDFL BCL Sh.1 million Normal market price Nil
MHSL MDFL Sh.66 million Comparable uncontrolled price plus Sh.6 million
10%
Required:
(a) Define the terms “related party” and “related party transaction” as laid down in IAS 24:
Related party Disclosures (2 marks)
(b) IAS 24 deals only with certain related party relationships. State the 5 related party
relationships dealt with. (5 marks)
(c) Disclose the information required by IAS 24 in the consolidated financial statements of
TPL, and in the individual financial statements of TTL, MDFL and MHSL. (10 marks)
(Total: 17 marks)
QUESTION THREE
Jallam Co. Ltd. had been preparing its financial statements using actual taxes payable method for
computing tax expense. In the year ended 30 June 2000, the company changed to deferred tax
method and the new policy was to be applied retroactively to the accounts of the years ended 30
June 1999 and 2000.
The following are the balance sheets of the company for the two years ended 30 June 1999 and
2000 before incorporating tax expense for the year 2000.

Year ended 30 June

2000 1999
Sh. ‘000’ Sh. ‘000’
Non-current assets
Fixed assets 47,000 53,500
Goodwill 3,000 3,500
Current assets
Stocks 13,500 7,500
Debtors 8,700 6,000
Prepayments 5,000 3,500
Bank and cash 3,000 2,000
80,200 76,000
Equity and liabilities Sh. ‘000’ Sh. ‘000’

Shares capital 30,000 30,000
Revaluation reserve 10,000 8,000
Revenue reserve 16,200 10,000
56,200 48,000
Long-term loan 10,000 15,000
Trade creditors 8,000 6,000
Accruals 6,000 4,500
Current tax - 2,500
80,200 76,000
The following additional information is provided:

1. The company reported profits before tax of Sh.6,200,000 in the year ended June 2000
2. Included in fixed assets are the following assets:
30 June 2000 30 June 1999

Sh. ‘000’ Sh. ‘000’
Leasehold property 7,500 9,000
Fixed assets without capital allowances 14,500 17,000
No acquisition or disposal of fixed assets took place in the year ended 30 June 2000
3. Written down value of fixed assets were Sh.22,500,000 and Sh.18,000,000 as at 30 June
1999 and 2000 respectively
4. Stocks as at 30 June 2000 are net of a general provision for price fluctuation of 10% of the
cost. The provision is not allowed for tax purposes.
5. Accruals include leave passage provision of Sh.2,500,000 as at 30 June 1999 and
Sh.1,800,000 as at June 2000
6. Prepayments for the year 2000 include Sh.2,000,000 allowed as a deduction on
computation of current tax.
7. Assets subjects to wear and tear allowance were first revalued in 1999 and revaluation
repeated in 2000. No adjustments was made to the tax base of the assets following the
revaluations.
8. Foreign exchange loss balances amounted to Sh.3,600,000 and Sh.2,800,000 on 30 June
1999 and 2000 respectively.
9. Donations in the year 2000 was Sh.5,000,000.
10 Tax rates in 1999 and 2000 were 40% and 50% respectively.
Current tax for a year is paid on 15 September of the following financial year.
Required:
(a) Current tax for the year ended 30 June 2000 (5 marks)
(b) Using the method recommended by the revised IAS 12, calculate deferred tax expense or
income for the years 1999 and 2000 (10 marks)
(c) The current tax account, deferred tax account and revaluation account for the years 1999
and 2000 (8 marks)
(Total: 23 marks)
QUESTION FOUR
(a) IAS 21 “The effects of changes in Foreign Exchange Rates” recommends that an entity
translates foreign currency items/net investment into its functional currency and reports
the effects of such translation.
Required:
(i) Define and briefly explain the functional currency concept. (3 marks)
(ii) Briefly outline the translation requirements for reporting a foreign currency business
transaction and for reporting the results of an investment in a foreign operation.
(6 marks)
(b) The following balances were extracted from the books lootex Ltd. for the year ended 30
September 2000.
Sh. ‘000’
Purchase of equipment 7,500
Purchase of raw materials 19,655
Depreciation expense 675
Interest expense 350
Investment income 310
Closing stock of raw materials 3,400
Minority interest in the profits of the subsidiary 200
Ordinary dividends 340
Value added tax – included in the turnover 8,000
Wages, salaries and pension 5,000
Current tax (corporation tax) 770
Turnover 32,135
Required:
Value added statement. (9 marks)
(Total: 18 marks)
QUESTION FIVE
(a) Distinguish between acquired and self-generated goodwill. State how goodwill of either
sort should be treated in the balance sheet. (5 marks)
(b) Deluxe Ltd. made the following acquisitions during the year ended 30 September 2000:
1. Purchase of the assets of a local trader. The purchase consideration, settled in cash
S.1.310,000 and the balance sheet of the sole trader showed net assets totaling
Sh.982,000. However it is estimated that the leasehold is undervalued by Sh.190,000
and that the fair value of the fixture and fittings is approximately 75% of the net
book value of Sh.240,000 shown in the balance sheet.

2. Purchase of the entire share capital of Planet Ltd. for Sh.560,000 on 31 May 2000.
Planet has net assets of Sh.320,000 at 1 October 1999 and had retained profits of
Sh.360,000 for the year ended 30 September 2000.
3. Purchase of an unicorporated business for Sh.700,000. The net assets of the

business were worth Sh.840,000 at purchase. However the business had been loss
making in recent years and there were net current liabilities of Sh.400,000 at
acquisition.
At 1.10.99, Deluxe Ltd. had the following reserves:
Retained profits Sh.8,620,000

Share premium account: Sh.6,000,000
The retained profit for the year ended 30 September 2000 was Sh.1,360,000.
Required:
(i) Calculate the goodwill arising on each acquisition. (9 marks)
(ii) Assuming that goodwill is written off directly to reserves, draw up the reserves note for
the individual financial statements of Deluxe Ltd. (6 marks)
(Total: 20 marks)
CPA PART III
DECEMBER 2001 Time Allowed: 3 hours
QUESTION ONE
Umma Ltd. A public company quoted on the Nairobi Stock Exchange, owns 80% of Ugeni Ltd.
A public company which is situated in a foreign country, Timoa. The currency of this country is
Trim(TR). Umma Ltd. acquired Ugeni Ltd. on 30 April 1999 for Ksh.220 million when the
retained profits of Ugeni Ltd. were TR 610 million. Ugeni Ltd. has not issued any shares since
acquisition. The following financial statements relate to the two companies.
Balance sheet at 31 December 2000

Umma Ltd Ugeni Ltd
Ksh. ‘million’ TR ‘million’
Fixed assets:
Tangible assets 945 1,890
Investment in Ugeni Ltd 270 -
Net current assets: 735 645
Creditors failing due after one year (375) (1,115)
1,575 1,420
Share capital 330 240

Share premium 350 80
Profit and loss account 895 1,100
1,575 1,420
Profit and loss account for the year ended 31 December 2000
Umma Ltd Ugeni Ltd
Ksh. ‘million’ TR ‘million’
Turnover 1,650 3,060
Cost of sales (945) (2,550)
Gross profit 705 510
Administrative and distribution cost (420) (51)
Income from Ugeni Ltd. 8 -
Interest payable (22) (102)
Operating profit before tax 271 357
Taxation (79) (153)
Profit on ordinary activities after tax 192 204
Dividends paid (20) (52)
Retained profits for the year. 172 152
1. During the year, Ugeni Ltd. sold goods to Umma for TR 104 million and made a profit
of TR 26 million on the transaction. All of the goods, which were exchanged on 30 June
2000 remained unsold at the year end. At 31 December 1999 there were goods sold by

Ugeni Ltd. to Umma Ltd held in the stock of Umma Ltd. These goods were valued at
Ksh.6 million on which Ugeni Ltd. made a profit of Ksh.2 million.
2. Ugeni Ltd. paid the dividend for the year ended 31 December 2000 on 30 June 2000.
No other dividend was proposed for the year. The tax effect has been accounted for
and may be ignored.
3. The fair value of the net assets of Ugeni Ltd. at the date of acquisition was TR 1,040
million. The fair value increment all due to tangible fixed assets has not however been
incorporated in the books of Ugeni Ltd.
4. Goodwill fractuates with changes in the exchange rate.
5. Tangible fixed assets are depreciated over five years on a straight-line basis with a full
year’s charge provided in the year of acquisition.
6. A loan of Ksh.50 million was raised by Ugeni Ltd. from Umma Ltd on 31 May 2000.
The loan is interest free and is repayable in 2009. The loan is included in the cost
investment in Ugeni Ltd. An amount of TR 65 million had been paid to Umma Ltd on
31 December 2000 in part settlement on the loan. The amount had not been received
by Umma Ltd. and had not been included in its financial statements as at 31 December
2000.
7. The following exchange rates are relevant for translation:
Trims (TR) to the K Shilling:

30 April 1999 4.0
31 December 1999 4.6
1 January 2000 4.7
31 May 2000 5.3
30 June 2000 5.2
31 December 2000 5.0
Weighed average for 2000 5.1
8. The functional currency of Ugeni Ltd was different from the presentation currency of
the Group (Kshs).
Required:
(a). Consolidated profit and loss account for the year ended 31 December 2000 (11 marks)
(b). Consolidated balance sheet as at 31 December 2000 (10 marks)
(c). Statement for the movement in consolidated reserves for the year ended
31 December 2000 (4 marks)
(Total: 25 marks)
QUESTION TWO
The following draft financial statement relate to Baraka Group Ltd.:
Group balance sheet as at 31 May 2001
2001 2000
Sh. million’ Sh. million’
Assets:
Intangible assets (goodwill) 90 83
Tangible assets 1,239 1,010
Investments 780 270
2,109 1,363
Current assets:
Inventories 750 588
Trade receivables 660 530
Cash and cash equivalents 45 140
1,455 1,258
Total assets 3,564 2,621
Equity and Liabilities:

Capital and reserves
Called-up capital-ordinary shares of Sh.10 100 70
Share premium account 85 15
Revaluation reserves 30 10
Accumulated profits 200 103
415 198
Minority interest 250 150
7% redeemable preference shares 136 130
interest bearing borrowings 1,262 930
1,398 1,060
Current liabilities: 1,501 1,213
Total equity and liabilities 3,564 2,621
Group income statement for the year ended 31 May 2001

Sh.million Sh.milliom
Revenue 7,310
Cost of sales (5,920)
Gross profit 1,390
Distribution and administrative expenses (772)
Profit from operations 618
Income from associates 98
Profit on sale of tangible non-current assets 15
Interest receivable 34
Profit before taxation 728
Income tax expense(including tax on income from
associates of Sh.15 million) (213)
Profit after taxation 515
Minority interests (97)
Net profit from ordinary activities 418

1. Baraka Group Ltd. acquired an 80% holding in Neema Ltd. on 1 June 2000. The fair
value of the assets of Neema Ltd. on 1 June 2000 were as follows:
Sh. ‘million’
Non-current assets (tangible) 60
Inventories 30
Trade receivables 25
Cash and cash equivalents 35
Trade payables (20)
Taxation (30)
100
The purchase consideration was Sh.97 million and comprised 2 million ordinary shares
of Sh.10 each in Baraka Group Ltd valued at Sh.40 per share and Sh.17 million in cash.
The group amortises goodwill over 10 years.
2. The movement in tangible non-current assets for the year ended 31 May 2001,
comprised the following amounts at net-book value:
Sh. ‘million’
Balance as at 1 June 2000 1,010
Additions (including Neema Ltd.) 278
Revaluation of properties 20
Disposals (30)
Depreciation (39)
Balance as at 31 May 2001 1,239
3. Interest receivable included in trade receivables was Sh.15 million as at 31 May 2000 and
Sh.17 million as at 31 May 2001.
4. Included in non-current liabilities is a bill of exchange for Sh.100 million (raised on 30
June 2000) which was given to a supplier on the purchase of non-current tangible assets
and which is payable on 1 July 2002.
5. There have been no sales of non-current investment in the year. The investments
included under non-current assets comprised the following items:
2001 2000
Sh. Million Sh. Million
Investment in associated company 300 220
Trade investment (including foreign equity
investment of Sh.400 million as at 31 May 2001) 480 50
780 270
6. The preference share dividends are always paid in full on 1 July each year, and are
included in interest payable in the income statement. Additionally, a charge of Sh.6
million has been made in the interest payable figures to provide for a premium payable
on the preference shares on redemption.
7. Current liabilities comprised the following items:

2001 2000
Sh. ‘million’ Sh. ‘million’
Trade payables (including interest payable, Sh. 9
million in 2001, nil in year 2000) 1,193 913
Taxation 203 200
Dividends (dividends charges in the income
statement for the year 2001 amounted to Sh.126 105 100
million) 1,501 1,213
8. Baraka Group Ltd allotted 1 million ordinary shares of Sh.10 at a price of Sh.20 upon
the exercise of directors’ option during the year.
9. There was an exchange loss on re-translation of foreign equity investment of Sh.205
million and again on the loan to finance the foreign equity investment of Sh.10 million.
A loan of Sh.300 million was taken out in 2000/2001 to finance a foreign equity
investment of Sh.400 million in Paka Ltd.
Required:
Group cash flow statement in accordance with IAS 7 as at 31 May 2001 (Total: 20 marks)
QUESTION THREE
Naitex Ltd., prepares its financial statements on both historical cost accounting basis and
inflation adjusted accounting basis using current purchasing power method.
Given below are the trading, profit and loss accounts for the year ended 31 March 2001 and
comparative balance sheets of the company for the years ended 31 March 2000 and 31 March
2001.
Profit and loss account for the year ended 31 March 2001
(Historical cost accounting basis)
Sh. ‘000’ Sh. ‘000’
Sales 90,000
Opening stock 30,000
Purchases 65,000
95,000
Closing stock 35,000
Cost of sales 60,000
Gross profit 30,000
Expenses:
Loan interest 500
Salaries and wages 3,500
Depreciation 5,000
Other expenses 1,000 10,000
Profit before tax 20,000
Taxation 8,000
Profit after tax 12,000
Dividends paid:
Ordinary
Preference 2,500
Dividends proposed: 1,000
Ordinary

Preference 2,500
Retained profits for the year 1,000 7,000
5,000
Balance sheets as at 31 March
(Historical cost basis)
2001 2000
Sh.‘000’ Sh.’000’
Stocks 35,000 30,000
Debtors 40,000 34,000
Bank balance 5,000 8,000
152,000 131,000
Ordinary share capital 70,000 60,000
10% preference share capital 20,000 20,000
Reserves 23,000 18,000
113,000 98,000
Loan 18,000 20,000
Accruals 300 500
Proposed dividend 3,500 -
152,000 131,000
The following additional information is provided:

1. Out of the total sales of the year, Sh.30,000,000 was a special order and was made in mid-
January 2001. Purchases for the special order were made in the same period. Other sales and
purchases were made uniformly throughout the year. Gross profit on all sales was 331/3 %
of sales value.
2. Closing stocks represented an average of two months purchases.
3. Loan interest was paid in two equal installments on 15 September 2000 and 15 March 2001.
4. Salaries and wages and other expenses paid in cash accrued evenly throughout the year.
5. Tax was paid in two equal installments on 30 September 2000 and 31 March 2001.
6. Interim dividend was paid on 30 September 2000.
7. The business purchased fixed assets worth Sh.17, 000,000 on 15 October 2000. These assets
were depreciated by Sh.1,000,000 in the year ended 31 March 2001. Other fixed assets were
purchased when the retail price index was 120.
8. The company issued 500,000 ordinary shares of Sh.20 each, at par on 15 June 2000. The
remaining ordinary shares were issued at the inception of the company when the retail price
index was 100.
9. Retail price indices moved uniformly throughout the two years.
10. Retail price indices prevailing for some selected dates were as follows:
Year ended 31 March

2001 2000
Mid–January 144 120
Mid-March 148 124
Mid-June 154 130
Mid-September 160 136
Mid-December 166 142
Average index 137 -
Index on 31 March 149 125
Mid-October - 138
Required:
Using the current purchasing power accounting method and rounding the workings to the
nearest thousand:
(a). Determine the revenue reserves as at 31 March 2000. (5 marks)

(b). Calculate the gain or loss on holding monetary items. (5 marks)
(c). Prepare the trading, profit and loss account for the year ended 31 March 2001 and the
balance sheet as at that date. (10 marks)
(Total: 20 marks)
QUESTION FOUR
Manga Coffee Ltd has prepared its financial statements for the year ending 31 March 2001.
During the annual general meeting, some of the shareholders did not understand why the “value
added” statement had been included in the financial statements, yet the profit and loss account
was provided. They strongly felt that this was a duplication of the profit and loss account and
thus it should not be included in the future financial statements of the company.
Required:
(a). (i). Briefly explain the meaning of the term “value added”. (2 marks)
(ii). Give the advantages and disadvantages of including the “value added” statements
(6 marks)
(b). The following is the summarized trading, profit and loss account of Manga Coffee Ltd
for the year ended 31 March 2001:
Manga Coffee Ltd. Trading, Profit and Loss Account for the year ended 31 March 2001
Sh. Sh.
Sales 30,324,000
Cost of sales 19,620,000
Gross profit 10,704,000
Less: Wages and salaries 3,480,000
Interest on loan 800,000
Depreciation 1,240,000
General expenses 450,000
5,970,000
Profit before tax 4,734,000
Less corporation tax (at 30%) 1,420,200
Profit after tax 3,313,800
Dividends 1,800,000
Retained profit for the year 1,513,800
Required:
A value added statement for the year ended 31 March 2001(7 marks) (Total: 15 marks)
QUESTION FIVE
(a). The original IAS 12 did not refer explicitly to fair value adjustments made on a business
combination and did not require an enterprise to recognize a deferred tax liability in
respect of asset revaluations. The revised IAS 12 “income taxes” now requires deferred
tax adjustments for these items and classifies them as temporary differences.

Required:
Explain the reasons why IAS 12 (revised) requires companies to provide for deferred
taxation on revaluations of assets and fair value adjustments on a business combination
irrespective of the tax effect in the current accounting period. (6 marks)
(b). Baobab Ltd. was incorporated on 1 April 2000. In the year ended 31 March 2001, the
company made a profit before taxation of Sh.10,000,000 (depreciation charged being
Sh.1,000,000). The company had made the following capital additions:
Plant - Sh.4,800,000
Motor vehicles - Sh.1,200,000
Corporation tax is chargeable at the rate of 30%. Capital deductions are computed at the
rate of 25% per annum on written-down value.
The company has prepared capital expenditure budgets as at 31 March 2001 which
reveal the following patterns:
Capital allowance Depreciation

Sh.’000’ Sh.’000’
Year to 31 March 2002 1,700 1,600
Year to 31 March 2003 2,300 1,900
Year to 31 March 2004 2,100 1,900
Year to 31 March 2005 1,500 2,100
Year to 31 March 2006 2,400 2,900
Year to 31 March 2007 2,500 2,000
From 1 April 2007, capital allowances are expected to exceed depreciation charges each year.
Required:
(i). Compute the corporation payable for the year ended 31 March 2001 (2 marks)
(ii). Compute the deferred tax charge for the year ended 31 March 2001 on:
Full-provision basis (5 marks)
Partial-provision basis (7 marks)
(Show the profit and loss account and balance sheet extracts with respect to the provisions
under each method). (Total: 20 marks)
CPA PART III
MAY 2002 Time Allowed: 3 hours
QUESTION ONE
M Ltd. started operating several years ago. As a strategy to expand its operations, its
management has in the recent past purchased shares from other companies, whose trial balances
are given below:
Trial balance as at 31 December 2001

M. Ltd. H. Ltd. C. Ltd. A. Ltd.
Sh. Sh. Sh. Sh.
‘000’ ‘000’ ‘000’ ‘000’
Property and equipment 250,000 220,000 200,000 96,000
7,500,000 ordinary shares of Sh.10 each in H. Ltd. 165,000 - - -
6,000,000 7% non-cumulative preference shares of Sh.10
each in H. Ltd. 60,000 - - -
6% debentures of H.Ltd. 5,000 - - -
1,800,000 ordinary shares of Sh.10 each in A. Ltd. 26,100 - - -
6,400,000 equity shares in C. Ltd. of Sh.10 each - 102,000 - -
Current assets. 145,500 143,400 120,000 50,000
651,600 465,400 320,000 146,000
Ordinary shares of Sh.10 each. 300,000 100,000 80,000 60,000

7% non-cumulative preference shares of Sh.10 each - 80,000 - -
General reserve 50,000 40,000 40,000 6,000
Profit and loss account 98,500 44,400 100,000 30,000
Provision for depreciation 60,000 130,000 40,000 20,000
6% debentures - 20,000 - -
Proposed dividend: Ordinary 30,000 10,000 - 10,000
Preference - 5,600 - -
Accrued debenture interest - 1,200 - -
Trade payables 113,100 34,200 60,000 20,000
651,600 465,400 320,000 146,000
1. The general reserves of all the companies were the same as they were one year ago. The
profit and loss account balances of C. Ltd. and A. Ltd. were Sh.16 million and Sh.21 million
respectively at the time their shares were purchased, one year previous to the preparation of
the balance sheets provided.
2. M Ltd. acquired the shares of H. Ltd cum-dividend on 1 January 2001. The balance on the
profit and loss account of H Ltd. consisted of the following:

Sh.’000’
Profit and loss account balance on 31 December 2000 28,000
Net profit for the period ended 31 December 2001 32,000
60,000
Less proposed dividend (15,600)
3. The balance on the profit and loss account of H. Ltd. at the acquisition date is after
providing for preference dividend of Sh5.6 million and a proposed ordinary dividend of
Sh.5 million, both of which were subsequently paid and credited to the profit and loss
account of M. Ltd.
4. No entries have been made in the books of M Ltd. in respect of debenture interest due
from, or proposed dividends from two of its investments, except that dividends due from A
Ltd were credited to M Ltd.’s profit and loss account and the corresponding entry made in
its debtors.
5. The debentures of H Ltd were purchased at par.
6. The stock in trade of H Ltd. on 31 December 2001 includes Sh.6 million in respect of goods
purchased from M. Ltd. These goods had been sold by M. Ltd at such a price that M. Ltd
earned a profit of 20% on the invoice price.
7. The group policy is to account for any associate company using the equity method.
Goodwill arising on consolidation is amortized using the straight line method over a useful
life of five years, (assuming a zero residual value) a proportionate charge being made for any
period of control of less than a full year. All unrealized profit on closing stock is removed
from the accounts of the company that realized it, giving a proportionate charge to the
minority interest if appropriate.
8. Dividends to minority interest shareholders are shown as part of minority interest.
9. H Ltd. sold a fixed asset on 31 December 2001 to M Ltd. for Sh.20 million, making a 20%
profit on the invoice price. H. Ltd. depreciates its assets at 20% using the straight line
method. H Ltd.’s accountant erroneously used selling price for depreciation purposes,
however the cost of assets reflected the correct amounts
Required:
A consolidated balance sheet of M Ltd. and its subsidiaries as at 31 December 2001
(Total: 25 marks)
QUESTION TWO
Golden Treasures Retirement Benefit Scheme is a defined benefit scheme that has been
operating for the last 30 years. The General Manager cannot understand why the accountants
have been charging a constant pension cost in the financial statement different from the
amounts of actual contributions made during the period. The fund accountant has explained to
him that this is as a result of the difference between funding and accounting for pension
schemes in periods of pension scheme surpluses or deficits arising from variations in regular
costs that are caused by factors such as experience adjustments and effects of changes in
actuarial assumptions.
Required:
(a). With reference to IAS 19 (Employee Benefits), revised, define the following terms:
(i). Experience adjustments. (2 marks)

(ii). Accrued benefit valuation methods. (2 marks)
(iii). Current service cost (2 marks)
(iv). Vested employee benefits (2 marks)
(b). The actuarial valuation of Golden Treasures Retirement Benefit Scheme as at 31

December 2001 showed a deficiency of Sh.90 million. The actuary recommended that
the company eliminated the deficiency by three lump sum payments of Sh.30 million
each in addition to the standard contribution of Sh.10 million per annum. The
contributions would continue at Sh.10 million per annum thereafter. The average
remaining service life of employees in the scheme as at 31 December 2001 was 10 years.
Required:
Determine the charge in the income statement and the figure to be disclosed in the
scheme’s balance sheet as a net pension liability or prepayment in each of the years 2002
to 2011. (6 marks)
(c). Suppose the actuarial valuation at 31 December 2001 of Golden Treasures Retirement
Benefit Scheme showed a surplus of Sh.260 million. The actuary then recommended
that the company eliminates this surplus by taking a contribution holiday for the first
two years, and then pay yearly contributions of Sh.30 million for eight years. After the
eight years, the standard contribution would be Sh.50 million per annum. The average
remaining service life of employees in the scheme as at 31 December 2001 was 10 years.
Required:
Compute the figure to be charged in the income statement and the figure to be
disclosed in the balance sheet of the scheme as a net pension liability or prepayment in
each of the years 2002 to 2011. (6 marks)
Note: Parts (b) and (c) are independent of each other (Total: 20 marks)
QUESTION THREE
Gawanya Ltd is preparing segmental report for inclusion in its financial accounts for the year
ended 31 December 2001. The figures given below relate to Gawanya Ltd. And its subsidiaries
but exclude information on associated companies
Sh.’0
Sales to customers outside the group by stationery division 11,7
Sales to customers outside the group by Kenyan companies 28,2
Sales not derived from stationery, tissue or packaging activities 3,2
Sales made to customers outside the group by tissue division. 18,3
Assets used by the Ugandan subsidiary companies 30,6
Assets not allocable to stationery, tissue or packaging activities 14,8
Assets used by the stationery division 31,7
Sales by the tissue division to other group members 3,6
Assets used by the packaging division 17,7
Assets used by the Kenyan companies 41,8
Sales not allocated to Kenya, Uganda or other areas 3,2
Sales by the stationery division to other group members 1,2
Sales made by the group to other areas of the world. 1,4
Expenses not allocated to Kenya, Uganda or other areas 4,0
Sales to customers outside the group by Ugandan companies 7,2
Expenses not allocated to stationery, tissue or packaging services 5,0
Sales by Ugandan companies to group members 2,1
Sales to customers outside the group for bureau service 5,2

Sales by Kenyan companies to other group members 2,430

Assets used by the tissue division 44,620
Assets used by the group in other areas. 21,660
Assets not allocated to Kenya, Uganda or other areas. 14,921
Segmental net profit by industry - Stationery 2,442
- Tissue 5,916
- Packaging 821
Segmental net profit by geographical area - Kenya 4,873
- Uganda 3,127
- Other areas 487
Consolidated net profit by industry 8,978
Consolidated net profit by geographical area 8,047
Required:
(a). An industry and geographical segmental report in accordance with IAS 14 (reporting
Financial Information by Segment) for inclusion in the annual report to give the
maximum information to the shareholders. (12 marks)
(b). Using Gawanya Ltd.’s figures as illustrations, discuss items for which you consider there
is need for further information to assist the reader to interpret the segmental data.
(3 marks)
(c). Identify the problems associated with segmental reporting. (5 marks)
(Total: 20 marks)
QUESTION FOUR
(a). Briefly explain what is meant by off-balance sheet financing and its effects on the
financial statements (5 marks)
(b). The summarized cash account and the fixed asset schedule of Pivot Ltd. For the year
ended 31 December 2001 are as given below:
Summarized Cash Account

Sh. ’000’ Sh. ’000’
Balance brought down 500 Wages 1,350
Cash from cash sales 3,500 Cash paid to suppliers 4,320
Cash from credit sales 5,750 Tax paid 100
Cash from issue of shares 1,200 Cash paid on finance lease 700
Cash from sale of buildings 970 Final dividend for year 2000 100
Interim dividend for year 2001 50
_____ Other expenses 600
11,920 Balance carried down 4,700
Balance brought down 4,700 11,920
Fixed assets schedule

Plant Building Sh.’000’ Total
Sh.’000’ Sh.’000’
Cost at 1 January 2001 10,000 15,000 25,000
Acquisitions 4,730 - 4,730
Disposal - (5,000) (5,000)
Cost at 31 December 2001 14,730 10,000 24,730
Accumulated depreciation:
Balance brought forward 3,500 6,000 9,500
Charge for the year 650 1,500 2,150
Disposals - (4,500) (4,500)
Balance as at 31 December 2001 4,150 3,000 7,150
Other information:
1. Tax charge for the year was Sh.400,000. The opening balance on the tax liability
account was Sh.100,000.
2. The proposed final dividend for the year 2001 was Sh.120,000.
3. Other expenses include insurance, which is paid a year in advance on 30 June. In
the year 2000, insurance of Sh.300,000 was paid. The amount paid in the year
2001 was Sh.400,000.
4. Accrued wages were Sh.75,000 at 1 January 2001 and Sh.95,000 at 31 December
2001.
5. Stocks were Sh.1,500,000 at January 2001 and Sh.1,700,000 at 31 December
2001.
6. All Sh.700,000 paid on the finance lease in the year 2001 represented capital. This
was the first year of the lease and interest was not paid until the second
payment, which was made in the year 2002. Interest at Sh.403,000 was included
in the year 2002 payment and was accrued in the year 2001 financial statements.
7. Opening and closing trade debtors and trade creditors were:
1 January 2001 31 December 2001

Sh. Sh.
Trade debtors 300,000 450,000
8. 6,000 ordinary shares of Sh.100 per value were issued at a premium on 1 March
2001.
9. Revenue reserves of Pivot Ltd. as at 31 December 2000 were Sh.948,000
10. Revenue reserves of Pivot Ltd as at 31 December 2001 were Sh.1,680,000.
Required:
A statement of cash flow using the direct method, including a reconciliation of the profit for the
year with cash from operations (15 marks)
(Total: 20 marks)

QUESTION FIVE
(a). Identify and explain five indicators which show that an impairment loss to a fixed asset may
have occurred (7 marks)
(b). Explain the problems associated with replacement cost accounting and net realizable value
accounting when used as alternatives to historical cost accounting (8 marks)
(Total: 15 marks)
CPA PART III
QUESTION ONE
Nyakuzi Ltd., a public limited company, listed at the Stock Exchange, owns 80% of the ordinary
share capital of Libra Ltd., a public limited company which is incorporated in a foreign country
whose local currency is dinars.
Nyakuzi Ltd. acquired Libra Ltd. on 1 November 2001 for Sh.440 million when the retained
profits of Libra Ltd. were 990 million dinars. Libra Ltd. has not issued any share capital nor
revalued any of its assets since acquisition.
The directors of Nyakuzi Ltd. have now received the financial statements of their foreign
subsidiary and intend to prepare the consolidated financial statements of the group for the year
ended 31 October 2002.
The directors have been made aware of the fact that since the professional accountancy body in
the foreign country does not require the mandatory compliance with International Accounting
Standards (IAS’s) by its members, the accounting treatment of several items in the subsidiary’s
financial statements may need adjustment to comply with relevant International Accounting
Standards before being incorporated in the group’s consolidated financial statements.
The following financial statements relate to the two companies:
Balance sheet as at 31 October 2002

Nyakuzi Ltd. Libra Ltd.
Ksh.’million’ Dinars ‘million’
Assets:
Non-current assets:
Tangible assets 1,800 3,800
Investment in Libra Ltd. 440
Intangible assets - 120
Total non-current assets 2,240 3,920
Net current assets 1,460 1,160
Total net assets 3,700 5,080
Financed by:
Capital and reserves:
Ordinary shares of Ksh. 10/10 dinars 650 480
Revaluation reserves - 120
Accumulated profits 1,610 1,100
Total shareholders funds 2,960 1,880
Non-current liabilities 740 3,200
Total capital employed 3,700 5,080

Income statement for the year ended 31 October 2002

Nyakuzi Ltd Libra Ltd.
Ksh ’million’ Dinars ’million’
Revenue 3,250 2,500
Cost of sales (1,890) (1,200)
Distribution and administrative expenses (840) (460)
Profit from operations 520 840
Profit before taxation 500 640
Income tax expense (150) (300)
Net profit on ordinary activities 350 340
Extra ordinary items - (220)
Net profit for the period 350 120
The following additional information relates to the financial statements of Libra Ltd. for the year
ended 31 October 2002.
1. Under local accounting standards, Libra Ltd. had capitalized an asset “market shares” under
intangible assets. This asset arose when Libra Ltd. acquired a company in the year ended 31
October 2002 and merged the companies activities with its own. This acquisition allowed
Libra Ltd. to obtain a significant share of a specific market and therefore, the excess of the
price paid over the fair value of assets is the “market shares” The amount capitalized was
120 million dinars and no amortization is charged by Libra Ltd. on “market shares”.
2. The amounts classified as extraordinary items in Libra Ltd’s income statement is made up as
follows:
(i). Revaluation loss

A non-current assets was physically damaged during the year and an amount of 90
million dinars was written off its carrying value as an impairment loss. This asset had
been revalued on 31 October 2000 and a credit of 60 million dinars still remains in the
revaluation reserve in respect of this asset.
(ii). Change in accounting policy

A change in accounting policy for research expenditure was made during the period in
order to comply with IAS 38. Prior to November 2001, research expenditure was
capitalized. The amount included in extra-ordinary items is 130 million dinars.
3. The fair value of the net assets of Libra Ltd. at the date of its acquisition by Nyakuzi Ltd.
was 2,400 million dinars after making changes to comply with the International Accounting
Standards (IAS’s). Goodwill fluctuates with changes in the exchange rate.
4. Nyakuzi Ltd. sold Ksh.150 million of components to Libra Ltd. on 31 May 2002, when the
legal ownership of goods passed to Libra Ltd. Due to a problem in shipping, these goods
were received by Libra Ltd. on 30 June 2002. Nyakuzi Ltd. made a profit of 20 per cent on
selling price of the component. All of the goods had been utilized in the production process
at 31 October 2002 but non of the finished goods had been sold at that date. Libra Ltd. had
paid for the goods on 31.7.2002. This was the only inter-company transaction in the year.
Foreign exchange gains/losses on such transactions are included in cost of sales by Libra
Ltd.
5. A dividend of Ksh. 40 million had been paid by Nyakuzi Ltd. during the year.
6. The following exchange rates were relevant:
Dinar to Ksh
31 October 2000 5
1 November 2001 6
1 April 2002 5.3
31 May 2002 5.2
31 June 2002 5.1
31 July 2002 4.2
31 October 2002 4
Weighed average for year to 31 October 2002 5
7. The directors have indicated that Libra Ltd. operates as a separate entity with little
management interference from the holding company.
Required:
(a). A consolidated income statement for the year ended 31 October 2002 (15 marks)
(b). A consolidated balance sheet for Nyakuzi Ltd. group as at 31 October 2002 (10 marks)
(Show any exchange gains/losses arising in the consolidated financial statement)
(Total: 25 marks)
QUESTION TWO
Latema Ltd. was incorporated and commenced business in 1995 specializing in the import and
export of a variety of goods throughout the East, Central and South Africa region.
Due to sustained inflationary conditions under which the company has operated since inception,
management has always considered that the traditional financial statements based on historical
cost basis are more informative and relevant if supplemented with corresponding current cost
accounts.
You have been approached to prepare the current cost accounts for the year ended 31
December 2001 and have been provided with the following information in respect of the
company.

Latema Ltd.
Balance Sheet as at 31 December 2000
Current Cost Accounting Basis
Sh.’000’ Sh.’000’
Assets
Non-current assets 13,650
Current assets
Stock 4,848
22,350
Equity and liabilities
Ordinary shares 6,000
Share premium 2,000
Current cost reserve 1,900
Retained earnings 1,850 11,750
Non-current liability
Loan 4,000
Current liabilities
Taxation 2,000
Trade creditors 2,800
Proposed dividends 300
Bank overdraft 1,500 6,600
22,350
Historical cost accounting basis
Sh.’000’ Sh.’000’
Sales 96,000
Opening stock 4,800
Purchases 73,200
Cost of goods available for sale 78,000
Closing stock 6,000 72,000
Gross profit 24,000
Expenses:
Loan interest expense 350
Administration expenses 8,600
Selling and distribution expense 4,250
Depreciation 1,800 15,000
Taxation 4,000
Dividends
- Interim paid 300
- Final proposed 600 900
Retained profits for the year 4,100
1. During the year ended 31 December 2001, the company paid all the loan interest expenses,
administration expenses and selling and distribution expenses.
2. Proposed dividends as at 31 December 2000 were paid in 2001 together with the interim
dividend for the year 2001.
3. The company received Sh.92,604,000 from its trade debtors and paid Sh.72,500,000 to its
trade creditors in the year ended 31 December 2001.
4. Total amount paid for taxation in the year ended 31 December 2001 was sh.4,500,000
5. The loan attracted an interest rate of 10% per annum and Sh.1,000,000 of the loan was
repaid on 30 June 2001.
6. The non-current asset consists of a fixed asset purchased in January 1998 at a cost of
Sh.18,000,000 and is being depreciated on a straight-line basis over a ten-year period based
on cost.
The historical cost accounting accumulated depreciation on the asset as at 31 December
2000 was Sh.5,400,000
The appropriate current cost accounting price indices for the fixed assets were as follows:
Price index
1 January 1998 date of purchase 120
31 December 1999 125
Current cost accounting depreciation adjustment is based on year-end current cost value of
the fixed asset.
7. The average age of stocks is one month and the suitable price indices applicable to stock and
monetary working capital moved as follows:
Price index
1 November 2000 100
Average for 2001 112
1 November 2001 120
8. It is the group’s policy to treat the balance at bank and bank overdraft as part of monetary
working capital.
Required:
(a) Current cost profit and loss account for the company for the year ended 31 December 2001(10 marks)
(b) Current cost balance sheet of the company as at 31 December 2001. (10 marks)
(Note: Round figures to the nearest thousand shillings) (Total: 20 marks)
QUESTION THREE
(a) Briefly explain the reasons why the Earnings Per Share (EPS) may not be an appropriate
basis for comparison of the performance of companies (4 marks)
(b) Hisa Ltd. has a complex capital structure.

The following information relates to the company for the year ended 31 May 2002:
1. The net profit of the company for the year ended 31 May 2002 and which is
attributable to the preference and ordinary shareholders of the company was
Sh.146 million. Of this amount, the net profit attributable to operations which
have since then been discontinued was Sh.33 million.
2. The ordinary shares of Sh.10 par value, in issue at 1 June 2001 totaled Sh.60
million On 1 September 2001, ordinary shares of Sh.10 par value were issued at
market price, for a sum of Sh.12 million.
3. The average market price of the shares of the company for the year ended 31
May 2002 was Sh.100 and the closing market price of the shares on 31 May
2002 was Sh.110.
4. On 1 January 2002, 300,000 ordinary shares of Sh.10 par value were issued at a
price of Sh.80 par share. Sh.40 of this price was payable on 1 January 2002 and
Sh.40 payable on 1 January 2003. Dividend participation of the issued shares is
at 50% until they are fully paid.
5. Convertible debentures of Sh.200 million at an interest rate of 5 per cent per
annum had been issued at par on 1 April 2001.
Half a year’s interest is payable on 30 September and 31 March each year. Each
Sh.10,000 of debentures is convertible at the holder’s option into 300 ordinary
shares at any time. Sh.50 million of debentures was converted on 1 April 2002
when the market price of the shares was Sh.105 par share.
6. Sh.10 million of convertible preference shares of Sh.10 had been issued in the
year ended 31 May 1999. Dividends on these shares are paid half-yearly on 30
November and 31 May at the rate of 6% per annum. The preference shares are
convertible into ordinary shares at the option of the preference shareholder on
the basis of two preference shares converted them into ordinary shares for 1
ordinary share fully paid. On 1 December 2001, holders of 6 million preference
shares converted them into ordinary shares.
7. Warrants to buy 6 million ordinary shares at Sh.6.60 per share were issued on 1
January 2002. The warrants expire in five years time. All the warrants were
exercised on 30 June 2002.
8. The financial statements of the company for the year ended 30 June 2002 were
approved on 1 August 2002.
9. The rate of taxation applicable is 30%.
Required:
i). Basic Earnings Per Share (EPS) of the company for the year ended 31 May 2002
(4 marks)
(ii). The number and value of anti-dilutive potential ordinary shares. (4 marks)
(iii). Diluted Earnings per Share (EPS) of the company for the year ended 31 May 2002
(8 marks)
[Note: Refer to IAS 33 “Earnings per Share”]
QUESTION FOUR
The following is the summarized balance sheet of Tabu Ltd. at 30 June 2002
Sh.’000’ Sh.’000’ Sh.’000’

Non-current assets:
Tangible: Freehold property 85,000
Plant 10,000
95,000
Intangible: Patents 10,500
Goodwill 28,000 38,500
133,500
Current assets:
Stock 85,000
Debtors 97,000
Investments (market value Sh.25 million) 11,000
Deferred advertising 20,000
213,000
Bank overdraft 39,000
Creditors 50,000
Debenture interest payable 4,500
Accruals 10,000
Directors loans 20,000 (123,500) 89,500
223,000
Financed by:
Share capital:
6% 8 million cumulative preference shares of Sh.10 each.
15 million ordinary shares of Sh.10 each. 80,000
150,000
Revenue reserves: 230,000
Profit and loss account
Shareholders account (82,000)
148,000
6% Debentures
75,000
223,600
The court approved a scheme of re-organization submitted by the debenture holders and agreed
upon by other interested parties to take effect on 1 July 2002 as follows:
1. The preference shares to be written down to Sh.7.50 each and the ordinary shares to Sh.2.00
each; each class of shares then to be consolidated into shares of Sh.10 each. The rate of
dividend on preference shares to be increased to 10%.
2. The preference dividends are four years in arrears of which three-quarters are to be waived
and ordinary shares are to be allocated at par for the balance.
3. The debenture holders to have their interest paid in cash, to take over freehold property
(book value Sh.20 million) at a valuation of Sh.24 million in part repayment of their holding
and to provide additional cash capital of Sh.26 million secured by a floating charge on the
company’s assets at an interest rate of Sh.12% per annum.

4. Patents, goodwill and deferred advertising to be written off, Sh.15 million to be written off
stock, Sh.11.7 million to be provided for bad debts and the remaining freehold properties to
be revalued at Sh.77.5 million.
5. Investments to be realized.
6. The directors to accept settlement of their loans as to 90% thereof by allotment of ordinary
shares at par and as to 5% in cash, the balance of 5% being waived.
7. The trade creditors to be paid Sh.0.10 in every shilling to maintain and obtain an extension
of the credit period.
8. The bank has sanctioned an overdraft limit of Sh.10 million to provide working capital.
9. There are capital commitments amounting to Sh.75 million which are to be canceled on
payment of 31/3 % of the contract price as a penalty.
10. The authorized capital was restored to its original amount.
Required:
(a). The capital reduction account to record the scheme of capital re-organization. (8 marks)
(b). The balance sheet of Tabu Limited as at 1 July 2002 immediately after affecting the scheme.
(12 marks)
(Total: 20 marks)
QUESTION FIVE
Many cooperate boards are now agreed on the need to take responsibility for any potential or
actual social impact caused by their companies’ activities. This is done through a social
responsibility report.
Required:
(a). Write short notes on five issues/stakeholders that may be addressed by a company’s social
responsibility report. (5 marks)
(b). Explain five benefits that would accrue to a company from the reporting of the
company’s social responsibility activities. (5 marks)
(c). Comparing conventional financial accounting reporting with social responsibility
reporting, list and explain five challenges peculiar to social responsibility accounting
. (5 marks)
(Total: 15 marks)
CPA PART III
JUNE 2003. Time Allowed: 3 hours
QUESTION ONE
P. Limited is a company quoted on the Nairobi Stock Exchange. Its area of operations is capital
equipment. It purchased 80% of the ordinary share capital of Q Limited on 1 January 1998. Q
Limited is a leading producer of cement and lime in the area. P. Limited purchased 75% of the
ordinary share of the capital of R Limited on 1 January 1999. R. Ltd. is a leading producer of
decorative coatings. This market has suffered a major decline since the investment was made. A
suitable purchaser bought the complete shareholding on 31 August 2002. The proceeds of the
sale were used to repay debt on 31 August 2002. The financial statements of the companies for
the year ended 31 December 2002 are as follows:
Income statement Balance Sheet

For year ended 31 December 2002 As at 31 December 2002
P Q R P Q R
Ltd. Ltd Ltd, Ltd. Ltd Ltd,
Sh. Sh Sh. Sh. Sh. Sh
million million million million Million million
Sales 5,400 4,800 3,600 Non-current assets:
Cost of sales (2,700) (3,200) (2,400) Property plant & 1,320 980 1,100
Gross profit 2,700 1,600 1,200 equipment 680
Expenses (1,800) (900) (900) Investment in subsidiary 2,000
Operating profit 900 700 300 730 570 480
Dividend received 390 - - Current assets 2,730 1,550 1,580
Finance cost (75) - - 500 500 400
Profit on disposal of Ordinary share capital 1,510 640 710
subsidiary 200 - - Retained earnings 2,010 1,140 1,110
Profit before tax 1,415 700 300 Shareholders funds 100 - -
Tax (250) (210) (90) Non-current liabilities 620 410 470
Profit after tax 1,165 490 210 Current liabilities 2,730 1,550 1,580
1. P. Ltd. had purchased its shareholdings in Q Ltd and R Ltd. when the balances of retained
earnings were Sh.100 million and Sh.200 million respectively. Neither Q Ltd nor R. Ltd has
issued any ordinary shares since they were acquired by P Ltd. The fair values of the
identifiable net assets of both Q Ltd. and R Ltd were equal to their carrying values at the
dates of acquisition. The investment in R. Ltd had cost P. Ltd. Sh.570 million.
2. No impairment losses have occurred in respect of their investment.
3. P Ltd., Q Ltd. and R Ltd. had paid dividends of Sh.500 million, Sh.300 million and Sh.200
million respectively on 31 July 2002.
4. There is no tax charge on the sale of the investment in R. Ltd.
5. P. Ltd, Q Ltd and R Ltd. are managed as three separate business segments. The group ‘s
primary segment reporting format is business segments. The board of directors of P Ltd
decided to sell the shares in R Ltd when they met on 14 February 2002 to review the

performance of the three companies for year ended 31 December 2001. There were no
impairment losses in any of the assets of R Ltd prior to its sale. The directors did not
announce the plan to sell R Ltd because they thought this would adversely affect the price at
which they could sell the subsidiary. A public announcement was made on 31 August 2002.
6. The directors want the amount of the revenue, expenses, pre-tax profit and the tax expense
of the discontinuing operation to be shown in separate column of the income statement and
the amount of the cash flow attributable to the operating, investing, financing activities of
the discontinuing operation shown in a separate column of the cash flow statement.
Required:
(a). Describe in the context of International Financial Reporting Standard (IFRS) 5 when a
disposal group can be classified as a Held-For-Sale. (3 marks)
(b). In the context of P Ltd, state the day when the classification criteria for Held-For-Sale
was met.
(c). State four items of information (other than those included in note 6 above.) which
should be included in the financial statements in relation to the discontinued operation.
(4 marks)
(d). The financial statements of all the group companies for the year ended 31 December
2001 were authorized for issue on 11 March 2002. Should the financial statement for
the year ended 31 December 2001 disclose any information about the plan sale of R
Ltd.
(e). Prepare the income statement of the group for the year ended 31 December 2002, with
separate columns for “continuing Operation” “Discontinued operation” and
“Enterprise as a whole” Sales, cost of sales and expenses in R Ltd accrue evenly over
the year. The accounting policy note in the financial statements include the following
clause: Operating results of subsidiaries sold during the financial year are included up to
the date effective control ceased. There were no inter-company transactions. (7 marks)
(f). Prepare the group balance sheet as at 31 December 2002. (6 marks)
(g). A statement of changes in equity as at 31 December 2002 showing only one column for
‘retained earnings’. (3 marks)
(Total: 25 marks)
QUESTION TWO
Great Mountain Estates Limited is the holding company for a group of tea growing subsidiary
companies. In the year to 31 March 2003, it sold one of its subsidiaries so that the group’s area
of operations could be confined to a single area of the country. The directors have made this
decision as part of cost cutting exercise. The proceeds of the sale of the subsidiary were used to
repay debt. In spite of the reduction in interest rates in the country, the directors are of the view
that the interest cost of loans is excessive.
Consolidated Profit & Loss account for Consolidated Balance Sheet as at 31 March
the year ended 31 March 2003
Sh. Sh. 2003 2003
’m’ ’m’ Sh Sh.
Sales Capital employed ‘m’ ‘m’
Cost of sales 596 Share capital
Gross profit (417) Share premium 400 300
Other operating income 179 Retained earnings 112 84
Distribution costs 12 Shareholder’s funds 64 95
Administrative expenses (48) Minority interest 576 479
Other operating expenses (154) Non-current liabilities 13 21
Operating loss (19) Bank loans 589 500
Finance cost: Interest (30) Deferred tax liabilities 29 52
expense (35) Provisions for liabilities and 18 17
Profit on disposal of 19 charges 18 19
subsidiary (46) Finance lease liabilities - 2
Loss before tax 65 90
Tax: (2) 654 590
Current 13 Represented by:
Deferred tax Non-current asset:
11 Property, plant and equipment
Net Loss (35) cost:
Minority interest 4 Depreciation 705 769
Net loss attributable to (31) (161) (135)
shareholders.
Intangible assets: Goodwill 544 634
cost
40 50
(24) (50)
Amortization
16 25
Deferred tax assets 16 2
Current assets: 576 661
Inventories
Trade and other receivables 158 225
Tax recoverable 103 134
Cash and cash equivalents 11 9
3 5
Current liabilities 275 373
Trade and other payables 112 188
Current tax
Finance lease liabilities - 2
Bank overdrafts 2 8
83 246
Net current assets/(liabilities) 197 444
78 71
654 590

1. The assets and liabilities in the subsidiary (which was sold on 31 December 2002) were as
follows:
Sh. million
Property, plant, equipment cost 118
Depreciation (31)
87
Inventories 27
Trade and other receivables 41
Sh. million
Cash and bank balances 3
Bank overdraft (61)
Trade and other payables (38)
Bank loans (18)
Current tax payable (1)
40
Great Mountain Estates Limited had purchased 90% of the ordinary share capital of this
subsidiary on 1 April 1997 for Sh.28 million when the fair value and the carrying value
of the net assets were Sh.20 million. The bank overdraft is dealt with as part of the cash
equivalents.
2. The other companies in the group sold property, plant and equipment which had cost Sh.11
million for Sh.9 million.
3. The figures for provisions for liabilities and charges are made up entirely of amounts due in
respect of staff retirement gratuities.
4. There was an issue of ordinary shares at a premium of 30%, issue costs were charged against
the share premium.
5. The loss before tax is arrived at after charging the following items:
Sh. million
Depreciation of property, plant and equipment 65
Amortization of goodwill 4
Staff costs (2,433 members of staff at year end) 227
Auditors’ remuneration 3
Directors’ remuneration 2
6. The interest expense charged in the profit and loss account is made up of Sh.2 million on
finance leases and Sh.33 million on bank loans and overdrafts. At 31 March 2003, included
in trade and other payables is accrued interest of Sh.1 million on 31 March 2002 the figure
had been Sh.5 million.
7. Share issue costs are shown as cash flows from financing activities.
8. There were no purchases of property, plant and equipment using new finance leases.
Required:
Prepare the consolidated cashflow statement for the year ended 31 March 2003 using the
indirect method in IAS 7. Great Mountain Estates Limited shows interest paid as an operating
activity and wants the cashflow from operating activities to start with the loss before tax. Do not
include the detailed disclosure requirements in respect of the disposal of the subsidiary, but you
should show the total disposal consideration and the amount of cash and cash equivalents in the
subsidiary disposed of. A reconciliation of the cash equivalents in the cashflow statement with
the equivalent items reported in the balance sheet should be disclosed. (Total: 25 marks)
QUESTION THREE
M & I Bank Limited has its head office situated on “the hill” to the South West downtown
Nairobi. The piece of land of which the building is situated is freehold. The land cost Sh.10
million on 1 July 1989. The building on this piece of land was erected at a cost of Sh.100 million
and was completed in June 1991. M & I Bank Limited moved its head office into the building
during June 1991, and occupied the whole building. The board of directors estimated that the
useful life of the building was 50 years with effect from 1 July 1991. They estimated that the
residual value of the building was nil. They decided to have depreciation charged on the straight
–line method.
On 1 July 2000 M & I Bank Limited purchased the leasehold of a plot of land in downtown
Nairobi. The lease cost of Sh.102 million was for a period of 51 years. Between 1 July 2000 and
30 June 2001, a building was erected on this land at a cost of Sh.300 million. Initially it was
planned that a branch of the bank would be situated in the building but this was thought
inappropriate. As result, it was decided that the whole building was to be rented out. The
estimated useful life of this building was also 50 years and the residual value nil. M & I Bank
Limited have found it difficult to find tenants to occupy the building. Income and expenses in
relation to this building are as follows (these figures are in the ledger but are not yet reflected in
the financial statements):
Year ended 30 June 2002 2003

Sh million Sh million
Rental income receivable 24 54
Direct operating expenses including repairs and
Maintenance for floors rented out (6) (12)
Direct operating expensed including repairs and
maintenance for empty floors (6) (5)
Total direct operating expenses (12) (17)
Net income from investment property (12) 37
M & I Bank limited has always used the benchmark treatment for owner occupied under IAS 16
(property, plant and equipment) and the cost model for investment properties under IAS 40
(investment properties) however the directors were concerned about the fair values of the head
office building and land the buildings in downtown Nairobi, in case any impertinent losses
needed to be provided for under IAS 36 (impairment assets) in the year ended 30 June 2002. As
at 30 June 2002, the fair value of the head office land was Sh.50 million and the fair value of the
head office building was Sh.468 million – there was no change in the estimated useful life. The
fair value of the building in downtown Nairobi at 30 June 2002 was Sh.310 million. Kysons,
registered valuers and estate agents carried out this valuation. The directors had Kysons repeat
the valuation of the building in downtown Nairobi in June 2003. The fair value at 30 June 2003
will be Sh.318 million.
The directors decide to change the accounting policies in relation to owner-occupied property
and investment property, from the benchmark treatment and the cost model to the allowed
alternative treatment and the fair value model, respectively. They decide that an adjustment
should be made to the opening balance of the retained earnings for the earliest period presented
in the accounts to 30 June 2003. The depreciation charge of the year ended 30 June 2002 will not
change for the head office building. The directors think that the new accounting policies will

result in a more appropriate presentation of events in the financial statements. The statement of
changes in equity should reflect the fact that some of the revaluation surplus is realized as the
asset is used by the enterprise.
Required:
(a). Show the necessary journal entries required to finalize the accounts for the year ending
30 June 2003, taking into account the changes in the accounting policies. Show the prior
period adjustments separately. (7 marks)
(b). Show extracts from the balance sheet giving the figures as at 30 June 2002 and 30 June
2003 for land, buildings, revaluation reserve and deferred taxation. The rate of tax on
income is 30% and on capital gains is nil. (8 marks)
(c). Show extracts from the income statement that must be disclosed to ensure that the
disclosure requirements of the International Financial Reporting Standards are complied
with. (5 marks)
(Total: 20 marks)
QUESTION FOUR
Sumias Sugar Company Limited is in the process of finalizing its financial statements for the year
ended 31 March 2003.
Its loss before taxation for the year is Sh.110 million. Included in this figure is a capital gain on
the sale of some land: the capital gain was Sh.20 million. In arrival at loss figure, non-allowable
expenses (for taxation purposes) of Sh.10 million had been incurred and a non-allowable
depreciation charge of Sh.120 million had also been made. The equivalent tax-allowable capital
allowances (wear and tear deductions and farm works deductions) figure was Sh.50 million.
The performance of the company depends very much on how much cheap sugar is imported tax
free from COMESA region. However, the directors have an assurance from the Treasury that
suitable action will be taken. Based on this assurance you have projected that profit in the year to
31 March 2004 will be Sh.150 million; there will be a non-allowable expenses of Sh.20 million in
the year to 31 March 2004, and it is envisaged that a non-taxable capital gain will be made of
Sh.10 million (you have included these in the projected profit of Sh.150 million). The capital
allowances figure will be Sh.80 million and the depreciation charge will be Sh.130 million.
At 31 March 2002, there was a deferred tax liability due to accelerated capital allowances of
Sh.500 million and a deferred tax asset on a tax loss brought forward of Sh.20 million. The rate
of corporation tax throughout the period should be taken to be 30%. Tax losses can be carried
backwards in Kenya, but can be carried forward indefinitely.
Required:
(a). Compare the tax liability for the year ended 31 March 2003 and the estimated liability
for the year ending 31 March 2004. (1 mark)
(b). Show the part of the income statement from “profit(loss) before tax” to “profit(loss)
after tax” and showing the tax charge or credit in its separate components and as a sub-
total, for both years. (4 marks)
(c). Prepare the reconciliation of expected tax based on accounting profit/ (loss) to the tax
charge /(credit), for both years. (4 marks)
(d). Show the deferred tax figures in the Balance Sheets, offsetting if appropriate, and the
movement on the deferred tax account for both years. (6 marks)
(Total: 15 marks)
QUESTION FIVE
(a). International Accounting Standards 1 encourages the preparers of accounts to present,
outside the financial statements, a financial review by management, In the UK, this
review is called “The Operating and the Financial Review “ (OFR). In the US it is
referred to as “Management’s Discussion and Analysis of Financial Condition and
Results of Operation “(MDA) what does IAS suggest should be contained in this
report? (4 marks)
(b). IAS 1 goes on to suggest that enterprises should present additional statements such as
environmental reports and value added statements. What are the reasons given to justify
the presentation of these additional statements and when are they particularly used?
(3 marks)
(c). IAS 32 “Financial Instruments: Disclosure and Presentation” states that the purpose of
the disclosures required by this standard is to provide information that will enhance
understanding of the significance of on-balance-sheet and off-balance-sheet financial
instruments to an enterprise’s financial position, performance and cashflow and assist in
assessing the amounts, timing and certainty of future cashflows associated with those
instruments. State and briefly describe three types of financial risks described in the
standard, in relation to transactions in financial instruments. (3 marks)
(Total: 10 marks)

CPA PART III
QUESTION ONE
ZDC Ltd. acquired 40% of the ordinary shares of BSL Ltd. on 1 January 1999 for Sh.210 million
when the credit balance on the profit and loss account of BSL Ltd. was Sh.100 million.
On 1 July 2002, the directors of ZDC Ltd. acquired 90% of the ordinary shares of ADL Ltd.
The purchase consideration was settled by the issue of 24 million ordinary shares of ZDC Ltd.
which have a par value of Sh.20 but had a market value of Sh.32.50 as at 1 July 2002.
The financial statements of the three companies for the financial year ended 31 December 2002
are provided below:
ZDC Ltd. ADL Ltd. BSL Ltd.
Sh.‘million’ Sh.‘million’ Sh.‘million’
Sales 4,500 3,000 2,000
Cost of sales (3,325) (2,400) (1,600)
Gross profit 1,175 600 400
Dividend received 12 - -
1,187 600 400
Operating expenses (595) (330) (250)
Operating profit 592 270 150
Finance cost (50) - -
Profit before tax 542 270 150
Corporation tax (205) (100) (58)
Profit after tax 337 s170 92
Dividend paid (100) (50) (30)
Dividend proposed (100) (50) (30)
(200) (100) (60)
Retained profit 137 29 32

ZDC Ltd. ADL Ltd. BSL Ltd.
Sh.‘million’ Sh.‘million’ Sh.‘million’
Assets:
Fixed assets 1,450 700 450
Investment in BSL Ltd. at cost 210
Current assets 700 360 245
2,360 1,060 695
Equity and liabilities:
Share capital 1,000 500 300
Profit and loss account balance 545 310 212
1,545 810 512
Loans 500
Current liabilities 315 250 183
2,360 1,060 695
1. On 1 January 2002, ZDC Ltd., held stock of goods purchased from ADL Ltd. during the
year ended 31 December 2001 at a cost of Sh.25 million ADL Ltd. had made a profit of
20% on the selling price of the goods. None of the goods were included in the closing stock
of ZDC Ltd. as at 31 December 2002.
2. During the year ended 31 December 2002, ADL Ltd. made total sales of Sh.600 million to
ZDC Ltd. The sales were made at a profit of 25% on cost of and one-fifth of the goods
were included in the closing stock of ZDC Ltd. as at 31 December 2002. The sales were
made evenly during the year.
3. The fair values of the fixed assets of ADL Ltd. as at 1 July 2002 were the same as the net
book values.
4. As at 31 December 2002, ZDC Ltd. had in its closing stock, goods worth Sh.50 million
which were purchased from BSL Ltd. BSL Ltd. had made a profit of Sh.10 million on this
transaction.
5. ZDC Ltd. does not accrue its share of proposed dividends from group companies.
6. The trading results of ADL Ltd. accrued evenly during the year
7. ZDC Ltd. has not accounted for its cost of investment in ADL Ltd.
Required:
(a). The consolidated profit and loss account of ZDC Ltd. and its subsidiary ADL for the
year ended 31 December 2002 using the:
(i). Acquisition method (5 marks)
(ii). Merger method (5 marks)
(b). The consolidated balance sheet of ZDC Ltd. and its subsidiary ADL Ltd. as at 31
December 2002 using the:
(i). Acquisition method (5 marks)
(ii). Merger method (5 marks)
(Total: 20 marks)
QUESTION TWO
(a). The consolidated financial statements effectively show the performance of a group of
companies as if it were a single entity. Many commentators on accounting have argued
that to aggregate financial information relating to several subsidiaries that operate in
different industries and markets produces information that may conceal important data
and has the potential to confuse those who wish to analyse it.
Required:
(i). Identify the main items of information that require disclosure under IAS 14
(Segment Reporting) (2 marks)
(ii). Bearing in mind the above comments, identify the benefits of segmental
information (4 marks)
(iii). Identify the main problems associated with the provision of segmental
information. (4 marks)
(b). The following information has been extracted from the consolidated financial
statements of Wengi Ltd. and its subsidiaries for the year ended 31 October 2003.

Sh. ‘million’
Sales revenue 900
Cost of sales 634
Distribution cost 87
Central administration 37
Amortisation of goodwill during the year 20
Finance costs/(lease Sh.10 m debenture interest Sh.12 m) 22
Dividends 50
Goodwill on consolidation 60
Non-current assets Owned 370
Leased 150
Current assets 160
Current liabilities 90
Finance lease obligation 200
10% debentures 120
The activities of Wengi Ltd. relate to three operational segments: Engineering, Chemical
and Supermarket chain. Information relating to each of the segments is as follows:
Engineering Chemical Supermarket

Sales revenue Sh.420 million Sh.340 million Sh.200 million
Gross profit margin on external sales 20% 40% 25%
Owned non-current assets Sh.150 million Sh.120 million Sh.100 million
Proportion of leased assets 60% 40% Nil
Current assets Sh.70 million Sh.60 million Sh.30 million
Current liabilities Sh.40 million Sh.20 million Sh.30 million
Proportion of lease obligations 50% 50% Nil
1. The consolidated figures exclude inter-segment trading whereas the segmental figures
include the results of inter-segment trading
2. During the year ended 31 October 2003, the engineering division manufactured the
steelwork for the superstructure of several new supermarkets. This work was invoiced at
cost (Sh.20 million) to the supermarket division. The other inter-segment sales (Sh.40
million) were from the chemicals division to the engineering division at the normal profit
margins. There were no group unrealised profits.
3. The finance cost comprise interest on finance lease and debenture interest. The
management of Wengi Ltd. considers the debenture interest to be a common cost but not
the interest on finance leases. This can be assumed to accrue in proportion to the value of
the outstanding lease obligations.
4. The goodwill on consolidation and its amortisation relate to a subsidiary that has both
engineering and chemicals operations. The management estimated that based on the relative
profitability at the time of acquisition, the value of goodwill should be allocated on the basis
of 30% to the engineering operations and 70% to the chemicals operations.
5. When preparing segment reports. Wengi Ltd. uses its operating activities as the basis for its
primary reporting format.
Required:
Segment report for Wengi Ltd. for the year ended 31 October 2003 in accordance with the
requirements of IAS 14 (Segment Reporting). (10 marks)
(Total: 20 marks)
QUESTION THREE
(a). In the context of Current Cost Accounting (CCA), briefly explain the meaning of the
following terms.
(i). Monetary working capital adjustment (2 marks)
(ii). Gearing adjustment (2 marks)
(b). Identify any four limitations of current cost accounting. (4 marks)
(c). The summarized accounts of Tosha Ltd. prepared on the historical cost basis for the year
ended 31 December 2002 were as follows.
Profit and loss account for the year ended 31 December 2002.
Sh. million
Operating profit 355
Interest payable (60)
Net profit before taxation 295
Corporation tax (150)
Net profit after taxation 145
Retained profit – 1 January 2002 180
Retained profit – 31 December 2002 325
Balance sheet as at 31 December

2001 2002
Sh. Sh. Sh. Sh.
‘million’ ‘million’ ‘million’ ‘million’
Fixed assets (cost) 1,000 1,000
Less: Depreciation 250 375
750 625
Current assets:
Stock (December purchase) 600 900
Cash in hand 30 50
630 950
Corporation tax payable (100) (150)
Net current assets 530 800
1,280 1,425
Finance by:
Share capital (Sh.100 par value) 700 700
Retained earnings 180 325
15% debentures 400 400
1,280 1,425
The directors of Tosha Ltd. intended to publish supplementary accounts based on current cost
accounting.
1. Sales, purchases and other expenses accrued evenly during the year.
2. Tosha Ltd. purchases and sells all goods on an immediate cash basis

3. The fixed assets were purchased on 1 January 2000 and are depreciated on straight line basis
over a period of a eight years assuming a nil residual value. The depreciation charge for year
ended 31 December 2002 was accordingly Sh.125,000,000.
4. The following price indices are provided for the company’s stock and fixed assets.
Stock Fixed assets

1 January 2000 - 100
Average for December 2001 130 -
31 December 2001 132 120
Average for year 2002 136 124
Average for December 2002 144 -
December 2002 145 132
5. The company’s stock turnover on average once a month.
Required:
(i). Current cost profit and loss account for the year ended 31 December 2002 (6 marks)
(ii). Current cost balance sheet as at 31 December 2002 (6 marks)
(The monetary working capital adjustment is not applicable to the affairs of Tosha Ltd.)
(Total: 20 marks)
QUESTION FOUR
In January 2003, Gwano Ltd. a private limited company, decided to float its shares to the public.
You have been approached to prepare the accountants report for inclusion in the prospectus.
The following information has been provided:
1. Extracts from the accountants of Gwano Ltd. for the last five financial years ended 31
March 2003 are given below:
2003 2002 2001 2000 1999

Sh. Sh. Sh. Sh. Sh.
‘000’ ‘000’ ‘000’ ‘000’ ‘000’
Turnover 37,600 31,000 29,000 24,500 20,000
Cost of sales 26,000 24,900 19,800 18,600 14,300
Administration expenses 2,300 1,600 1,300 1,200 1,100
Selling and distribution expenses 1,700 1,300 1,200 1,100 950
Finance costs 480 480 480 480 480
Profit on disposal of wholesale branch - - 360 - -
Taxation 1,800 1,520 1,450 1,000 900
Issued ordinary share capital 16,000 16,000 16,000 10,000 10,000
Dividend rate 10% 8% 6% 6% 5%
2. Balance sheet as at 31 March 2003:
Sh. ‘000’ Sh. ‘000’

Assets:
Non-current assets:
Freehold property (cost) 8.500
Plant and machinery (Net book value) 6,200
Furniture and fixtures (Net book value) 3,600
18,300
Current assets:
Stock (at lower of cost or net realizable value) 5,600
Debtors (net of specific provision for doubtful debts) 4,200
Quoted investments (Cost) 3,600
Prepayments 1,200
Balance at bank 850
15,450
33,750

Ordinary share capital (Sh. 20 per value) 16,000
Share premium 2,000
Profit and loss account 4,000
22,000
6% Debentures 4,000
8% Debentures 3,000
Deferred tax 1,050
8,050
Accruals 500
3,700
33,750
3. The 8% debentures were redeemed at per in May 2003 using proceeds from the sale of
one-half of the quoted investments. The investments sold had generated the following
incomes in the five years ended 31 March:
2003 2002 2001 2000 1999

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Investment income 152 140 125 110 80
4. In the financial year ended 31 March 2001, the company sold its wholesale branch and
made a profit of Sh.600,000 before tax. The applicable tax rate was 40%.
The turnover of this branch had been as follows for the three financial years ended 31
March:

2001 Sh.1,350,000
2000 Sh. 1,800,000
1999 Sh. 2,100,000
5. On 1 April 1999, the company purchased furniture worth Sh.1,000,000 which was
incorrectly recorded as a purchase of goods for resale. To date, the error has not been
corrected. The closing stock as at 31 March 2000 comprised only goods for resale.
Furniture is depreciated on the straight-line basis at 10% per annum based on cost. The
same rate applies to plant and machinery. Depreciation expense on furniture and fixtures
included in the administration expenses.
6. Investigations revealed that closing stocks on 31 March 2002 were understated by
Sh.600,000 whereas closing stocks on 31 March 2003 were overstated by Sh.400,000.
The stocks as at the end of other financial years were correctly stated.
7. As at 31 March 2001, the company had received a sales order of Sh.2 million for foods to
be supplied in the financial year ending 31 March 2002. The company treated the order as
sales for the financial year ended 31 March 2001 but included the cost of sales in the
closing stocks for the year.
The cost of this sales was Sh.1,500,000.
8. On 31 March 2003, freehold property was valued at Sh.12 million and quoted investments
had a market value of Sh.6 million.
9. In the year ended 31 March 2001, the company issued bonus shares financed by a
capitalization of its retained earnings.
10. As at 31 March 2003, the company had capital commitments amounting to Sh.120 million
of which Sh.80 million had been contracted for.
11. The turnover is the net aggregate amount receivable for goods supplied and services
rendered.
Required:
Accountants report for inclusion in the prospectus. (Total: 20 marks)
QUESTION FIVE
(a) Explain the meaning of the following terms as used in pension accounts
(i) Funded schemes. (2 marks)
(ii) Experience adjustments. (2 marks)
(b) Afya pensioners is a funded, non-contributory defined benefit scheme that was established
by the management of Afya Food processors Limited in 1950. The directors have always
expensed the company’s contribution to the scheme in the period of contribution and also
credited to the income statement of any period, any refunds made from the scheme during
the period in question.
As a result of the above policy, material variations in costs and incomes of Afya Food
Processors Limited have arisen in the past years. These worsened by any contribution
holidays or redundancies of employees. In this year’s audit, the auditors. Ujuzi and
Associates, described the company’s pension accounting policy as “inadequate” as the
resulting accounts do not give a true and fair view of pension costs to the employer. The
auditors have also pointed out that current policy can be used to manipulate the
company’s profit levels.
The auditors have suggested that either of two approaches (the accrued benefits or
prospective benefits) be adopted the management in accounting for pension costs.
Required:
(i) Do you agree with the auditors positions? Why? (4 marks)

(ii) State and explain three reasons why there may be variations in the regular pension
costs to the employer. (6 marks)
(iii) Briefly explain the two accounting approaches suggested by the auditor. What is
their effect on the pension fund? (4 marks)
(iv) What would be the main objective of adopting an accounting standard, with respect
to pension costs, for organization like Afya Food Processors Limited? (2 marks)
(Total: 20 marks)

CPA PART III
JUNE 2004 Time Allowed: 3 hours
QUESTION ONE
Rose Kenya Limited (RKL) exports roses to the flower auctions in Holland where its roses are
consistently rated A1. In order to reduce over-reliance on single supply source, RKL purchased
80% of the ordinary share capital of Roos South Africa Limited (RSAL) on 1 January 2003. Both
companies make up their accounts to 30 September each year. Neither company has any trade
with the other. Both companies compete for market share in the auctions in Holland. The
operations of RSAL are carried out with a significant degree of autonomy from those of RKL.
The following are the draft financial statements of the two companies prepared in Kenya
Shillings (Ksh.) for RKL and South African Rand (S.A. Rand) for RSAL
Balance sheets as at 30 September 2003

Assets: RKL RSAL
Non-current assets: Ksh. million S.A. Rand million
Property, plant and equipment 426 11
Prepaid operating lease rentals 12 -
Investment in subsidiary 336 -
774 11
Current assets:
Inventories 105 11
Receivables and prepayments 132 33
Cash and bank balances - 11
237 55
Payables and accrued expenses 101 5
Current tax 2 6
Bank overdraft 15 -
118 11
Net current assets 119 44
893 55
Capital employed: Ksh. million S.A. Rand million
Proposed dividends 100 -
Shareholders’ funds 654 44
Deferred tax 19 11
Borrowings 220 -
239 11
893 55
1. RKL financed part of the purchase price paid for the investment in RSAL by taking out a
South African Rand denominated loan in South Africa at the time of purchase of the
shareholding in RSAL. The amount of the loan was S.A Rand 20 million. The rate of
interest on the loan is 10% fixed. Interest on the loan to 30 September 2003 has been paid
in full.
2. Rates of exchanges between the Kenya Shilling (Ksh.) and the South African Rand (S.A.
Rand) at different dates are as follows:
1 October 2000: Date of purchase of property, plant and S.A. Rand Ksh.
equipment by RSAL 1 12.00
1 October 2002 1 7.40
1 January 2003 1 7.50
30 September 2003 1 11.00
Average for the year to 30 September 2003 1 9.50
Average for nine months to 30 September 2003 1 10.00
15 September 2003: Date RSAL paid its interim dividend 1 11.00
3. Trading by RSAL takes place evenly over the year. When demand is low on the auctions
in Holland, domestic demand is high, and this evens out trading conditions.
4. The directors of RKL regard the S.A. Rand denominated loan as a hedge against the
investment in RSAL. No capital repayments have been made nor are any foreseen in the
grace period to 31 December 2005. The exchange loss on this loan should be accounted
for in accordance with IAS 21 – The effects of Changes in Foreign Exchanges Rates.
5. Goodwill on the acquisition of RSAL is treated as an asset of RKL. The fair values of the
identifiable assets and liabilities of RSAL on 1 January 2003 approximate book values.
6. The dividend paid by RSAL is deemed to relate to the twelve month period ended 30
September 2003. The directors of RKL state that the foreign exchange difference on the
dividend paid of pre-acquisition net income should be deferred in the entirety until the
foreign exchange entity is disposed of completely at some future date.
Required:
(a) The consolidated income statement of RKL and RSAL for the year ended 30 September
2003 in accordance with International Financial Reporting Standards (IFRSs). (7 marks)
(b) The consolidated statement of changes in equity for the year ended 30 September 2003
showing columns only for retained earnings and proposed dividends. (4 marks)
(c) The consolidated balance sheet as at 30 September 2003 in accordance with IFRSs, but in
the same format as that of RKL. (11 marks)

(d) The effect on the reported profit for the year ended 30 September 2003 and the balance
sheet as at 30 September 2003. if the goodwill arising on the acquisition is treated as an
asset of the foreign entity. (3 marks)
Note: In all cases, ignore all adjustments relating to deferred tax. Goodwill amortisation
should be shown as a separate line item charged in arriving at operating profit. Your
answer should be correct to one decimal place. (Total: 25 marks)
QUESTION TWO
BZT Ltd. which deals in farm implements, prepares its financial statements using both the
historical cost accounting method and the inflation adjusted accounting method.
Provided below are the historical cost accounting comparative balance sheets prepared as at 31
December 2002 and 2003 and the trading profit and loss account for the financial year ended 31
December 2003.
Balance sheet as at December

2003 2002
Sh. “000” Sh. “000”
Assets:
Non-current assets:
Buildings 815,000 600,000
Machinery and equipment 200,000 350,000
1,015,000 950,000
Current assets:
Stock 420,000 340,000
Debtors 270,000 230,000
Bank balance and cash in hand 210,000 180,000
900,000 750,000
Total assets. 1,915,000 1,700,000

Capital and reserves: 600,000 500,000
Share premium 490,000 380,000
Retained profit 1,390,000 1,080,000
Non-current liability:
10% debentures 300,000 400,000
Proposed dividend 40,000 20,000
225,000 220,000
Total equity and liabilities 1,915,000 1,700,000
Trading profit and loss account for the year ended 31 December 2003
Sh. “000”
Sales: 3,600,000
Stock – 1 January 2003 340,000
Purchase 2,780,000
3,120,000
Less: Stock – 31 December 2003 420,000
Cost of sales (2,700,000)
Gross profit 900,000
Selling and distribution costs (215,000)
Administration costs (180,000)
Depreciation (185,000)
Debenture interest (35,000)
(615,000)
Operating profit 285,000
Profit on disposal of equipment 45,000
Tax (120,000)
Dividends: Paid (60,000)
Proposed (40,000)
(100,000)
Retained profit for the year 110,000
Retained profit brought forward 380,000
Retained profit carried forward 490,000
1. Sales, purchases, selling and distribution costs and administration costs occurred evenly
during the year ended 31 December 2003.
2. Debenture interest is paid semi-annually on 30 June and 31December. Debentures
amounting to Sh. Sh.100, 000, 000 were redeemed on 1 July 2003.
3. The company sold equipment with a net value of Sh.100, 000,000 on 30 September 2003
at a profit of Sh.45, 000,000. No depreciation was provided on this equipment for the year
ended 31 December 2003.
4. On 31 March 2003, the company purchased a building at Sh.350, 000,000. A full year’s
depreciation was provided on this newly purchased building at the rate of 10% per annum.
Depreciation was provided on the other assets as follows:
Sh.
Old buildings 100,000,000
Machinery and equipment 50,000,000
5. The company issued new ordinary shares at premium on 31 March 2003. The old shares
were issued at the time of incorporation of the company when the general retail price
index (RPI) was 100.
6. The closing stocks represent one month’s purchases.
7. Tax was paid in two equal instalments on 30 June and 31 December 2003, while interim
dividends were paid on 30 September 2003.
8. The general retail price index moved uniformly in the year.
9. Relevant indices were as follows:

Retail price index

Date of purchase of:: Old buildings 105
New building 122
Machinery and equipment including that sold in the year 110
30 November 2002 119.5
31 March 2003 123
30 June 2003 126
30 September 2003 129
30 November 2003 131.5
Average index for the year ended 31 December 2003 126.
Required:
The following financial statements using the current purchasing power accounting method:
(a) Trading and profit and loss account for the year ended 31 December 2003. (10 marks)
(b) Balance sheet as at 31 December 2003. (10 marks)
(Total: 20 marks)
QUESTION THREE
Matatizo ltd., which operates in the fruit processing industry, is in financial difficulty. The
balance sheet of the company as at 31 March 2004 was as given below:
Sh. Sh.
Equity shares of Sh.10 per value 10,000,000 Goodwill 3,000,000
10% preference shares of Sh.10 per value 4,000,000 Land 4,000,000
12% debentures 3,000,000 Building at cost 3,750,000
Interest payable on debentures 360,000 Machinery at cost 2,200,000
Loan from directors 1,000,000 Investments 2,250,000
Provision for depreciation: Stock 3,600,000
Buildings 750,000 Debtors 2,000,000
Machinery 800,000 Cash 50,000
Bank overdraft 1,500,000 Patents and trade marks 250,000
Sundry creditors 2,590,000 Profit and loss account balance 2,900,000
24,000,000 24,000,000
The authorized share capital of the company is 2,500,000 equity shares of Sh.10 each and
500,000 10% preference shares of Sh.10 each. It was decided during a meeting of the
shareholders and directors of the company to carry out a scheme of internal reconstruction, with
effect from 1 April 2004, as follows:
1. Each equity share is to be redesignated as a share of Sh.2.50. The equity shareholders are
to accept a reduction in the nominal value of their shares from Sh.10 to Sh.2.50. In
addition, the shareholders are to subscribe for a new issue on the basis of one share for
every two held at a price of Sh.4 per share.
2. The existing preference shares are to be exchanged for a new issue of 3000,000 15%
preference shares of Sh.10 each and 400,000 equity shares of Sh.2.50 each.
3. The debenture holders are to accept 100,000 equity shares of Sh.2.50 each in lieu of
interest payable. The 12% debentures are to be converted to 14% debentures. A further
Sh.1,000,000 of 14% debentures of Sh.100 each are to be issued and taken up by the
existing debenture holders at Sh.90 each.
4. Sh.400,000 of the loan from directors is to be cancelled. The balance of the loan is to be
settled by the issue of 100,000 equity shares of Sh.2.50 each.
5. The investments are to be sold at their current market price of Sh.3,000,000.
6. The bank overdraft is to be paid in full.
7. A sum of Sh.1,590,000 is to be paid to the creditors immediately and the balance in four
equal instalments at the end of each quarter.
8. All intangible assets are to be eliminated.
9. Assets are to be adjusted to their fair values as follows:
Sh.
Debtors 1,800,000
Stock 3,200,000
Machinery 1,000,000
Buildings 2,500,000
Land 3,200,000
10. It is estimated that under the new arrangement, the net profit before interest and tax will
be Sh.2,500,000 per year. There will be no tax liability relating to the company for the next
five years.
Required:
(a) Journal entries to effect the scheme of internal reconstruction. (10 marks)
(b) Balance sheet of the company as at 1 April 2004 (immediately after reconstruction).
(8 marks)
(c) A statement showing how the anticipated profits under the new arrangement will be
distributed to the various providers of capital. (2 marks)
(Total: 20 marks)
QUESTION FOUR
(a) Identify four shortcomings of traditional accounting methods in the context of accounting
for human resources. (4 marks)
(b) (i) Baraza Ltd., which supplies office equipment, has been trading for several
years. Its issued share capital as at 1 January 2001 was 300,000,000 ordinary
shares of Sh.100 per value. However, only 250,000,000 ordinary shares were
fully paid and the balance were paid up to the amount of Sh.75. The shares
issued at per.
The following information relates to the period 1 January 2001 to 31 December 2003:
1. On 1 April 2001, the outstanding amounts on the partly paid shares were received.
2. During the year ended 31 December 2002, Baraza Ltd. decided to raise further
capital by making a rights issue. The rights issue took place on 31 August 2002 on a 1
new share for every 2 existing shares basis at Sh.120 per share. The actual cum-rights
price on the last day of quotation was Sh.180.
3. Baraza Ltd. suffered from adverse publicity in the year 2003 and in order to prevent a
significant loss of profits, a new company, Kikundi Ltd., was formed on 1 July 2003
to take over the business of Baraza Ltd. In order to gain acceptance by existing
shareholders, Kikundi Ltd. issued 2 shares for every 1 held in Baraza Ltd. Uniting of
interests principles have been adopted in Kikundi Ltd. accounts in order to maintain
the comparability of reported earnings.

The following are the income statements of Baraza Ltd. and Kikundi Ltd. for the years ended 31
December 2001, 2002 and 2003:
Baraza Ltd. Kikundi Ltd.

Income statement for Income statement for
Year ended 31 December Year ended 31
December
2001 2001 2001
Sh. Sh. Sh.
“million” “million” “million”
Sales revenue 800 1,100 1,800
Cost of sales (300) (500) (800)
Gross Profit 500 600 1000
Administrative expenses (120) (130) (200)
Distribution costs (60) (50) (100)
Taxation (140) (170) (250)
Profit after tax 180 250 450
Extra ordinary item 20 - -
Profit for the year 200 250 450
Dividends paid (50) (70) (200)
Retained profit for the year 150 180 250
Required:
Calculate the earnings per share (EPS) figures which would appear in the financial statements of
Baraza Ltd. and Kikundi Ltd. for the years ended 31 December 2001, 2002 and 2003 with
comparative figures for 2002 and 2003. (12 marks)
(ii) Explain the reasons underlying the method of calculation of earnings per share (EPS) in a
financial year when there has been a rights issue. (4 marks)
(Total: 20 marks)
QUESTION FIVE
The following information relates to the Tsavo Group of companies:
1. Group profit and loss account for year ended 31 March 2004
Sh. “000”
Net profit before taxation 52,334
Share of associated company’s profits 25,071
77,405
Interest expense (6,850)
70,555
Taxation (of which Sh.6,713,000 is attributable to associated company) (18,769)
51,786
Proposed dividend (7,946)
Profits retained:
In parent and subsidiaries 41,922
In associated company 1,918
43,840
2. Group balance sheet as at 31 March

2004 2003
Non-current assets: Sh. Sh. Sh. Sh.
“000” “000” “000” “000”
Tangible fixed assets 456,758 353,323
Investment – associated company 210,432 208,514
667,190 561,837
Current assets:
Stock 166,318 133,164
Debtors 254,957 233,585
Cash in hand 4,110 7,398
425,385 374,147
Creditors: amounts falling due

within one year
Creditors 183,580 148,234
Taxation 22,605 19,180
Proposed dividend 7,946 6,028
302,770 206,322
Net current assets 122,615 167,825
789,805 729,662
Creditors: amounts falling due
after more than one year
Loan (57,403) (62,609)
Deferred taxation (10,549) (17,262)
721,853 649,791
Called up share capital 490,186 457,991
Reserves 231,667 191,800
721,853 649,791
3. During the year ended 31 march 2004, in relation to its operating activities, the Tsavo
group received Sh.208,240,000 from its customers and made the following cash payments:
Sh. “000”
To suppliers 58,910
To and on behalf of employees 44,662
Other 31,099
4. During the year ended 31 March 2004, Tsavo Ltd. acquired 100% of the ordinary share
capital of Mara Ltd. This purchase was financed by Sh.71,925,000 in cash and this issue of
235,000 ordinary shares at Sh.137 each.
The following information relates to Mara Ltd. as at the date of acquisition:

Sh. “000”
Tangible non-current assets 66,582
Stock 29,318
Debtors 17,810
Bank and cash balances 685
Creditors (14,248)
100,147
Share capital 38,360
Reserves 61,787
100,147
5. During the year ended 31 March 2004, additions to the tangible non-current assets,
excluding those acquired from Mara Ltd., amounted to Sh.44,388,000 and there were no
disposals. Depreciation for the non-current assets amounted to Sh.7,535,000 for the year
6. Dividends of Sh.15,070,000 were received from the associated company during the year
31 March 2004.
7. Interest of Sh.5,480,000 was paid during the year ended 31 March 2004.
Required:
Cash flow statement for the year ended 31 March 2004 in accordance with the requirement of
IAS 7 (Cash Flow Statements). (15 marks)
KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATION BOARD
CPA PART III
DECEMBER 2004 Time allowed: 3 hours
QUESTION ONE
KT Ltd acquired 90% of the ordinary shares of Sh. 10 par value, in SB Ltd. on 1 January 2000
when SB Ltd. had revenue reserves of Sh.1,500 million.
SB Ltd acquired 160 million ordinary shares of Sh.10 par value, in AZ Ltd. on 1 January 2001
when AZ Ltd. had revenue reserves of Sh.500 million.
The financial statements of the three companies for the year ended 31 December 2003 are
provided below:
Profit and loss accounts for the year ended 31 December 2003
KT LTD. SB LTD. AZ LTD.

Sh. million Sh. million Sh. million
Sales 7,200 4,700 2,450
Cost of sales 5,400 3,760 1,715
Gross profit 1,800 940 735
Dividends received 108 40 -
1908 980 735
Expenses 740 390 295
Profit before tax 1,168 590 440
Tax 420 230 176
Profit on disposal of shares 110 - -
858 360 264
Interim dividends paid 200 120 100
Final dividends proposed 300 120 100
500 240 200
Retained profit 358 120 64

Balance sheets as at 31 December 2003

KT LTD. SB LTD. AZ LTD.
Assets:
Investment in:
SB Ltd 8,400
AZ Ltd. 3,500
Fixed assets 15,500 9,700 6,500
Goodwill 500
Current assets 4,400 2,800 1,700
28,300 16,000 8,700
Ordinary share capital 10,000 6,000 4,000
Share premium 4,000 2,500 2,500
Revenue reserves 3,800 2,720 1,354
17,800 11,220 7,854
Bank loans 8,000 3,000 -
Current liabilities 2,500 1,780 846
28,300 16,000 8,700
Additional Information:
1. On 31 December 2002, SB Ltd. held stock bought from KT Ltd. for Sh. 120 million and on
which KT Ltd. had made a profit of 33% on cost.
2. In the year ended 31 December 2003, KT Ltd. made sales of Sh. 400 million to SB Ltd. at a
profit of 20% on selling price. One-quarter of the goods purchased by SB Ltd. from KT
Ltd. in the year remained unsold as at 31 December 2003.
3. All the three companies paid the interim dividends on 15 June 2003. No company has
accrued its share of proposed dividend from either its subsidiary or associate company.
4. On 30 September 2003. KT Ltd. sold 1200 million ordinary shares held in SB Ltd. for Sh.
2,510 million.
5. Fair values of tangibles assets were not materially different from their book values on the
date KT Ltd. acquired its control of SB Ltd. and on the date SB Ltd. acquired its holding in
AZ Ltd.
Required:
(a) Consolidated profit and loss account for the year ended 31 December 2003. (10 marks)
(b) Consolidated balance sheet as at 31 December 2003. (10 marks)
(Total: 20 marks)
QUESTION TWO
(a) In the context of IAS 17 (Leases), briefly explain the meaning of the following terms:
(i) Finance lease. (2 marks)
(ii) Guaranteed residual value. (2 marks)
(iii) Contingent rent. (2 marks)
(b) Silversands Manufacturing Company Ltd. has entered into an agreement with a finance
company, to lease a machine for a four year period. Under the terms of the agreement,
the machine is to be made available to Silversands Manufacturing Company Ltd. on 1
January 2005, when an immediate payment of Sh. 2,550,000 will be made, followed by
seven semi-annual payments of an equivalent amount.
The fair market price of the machine on 1 January 2005 is expected to be Sh.
16,320,000. The estimated life of this type of machine is four years. The implicit rate of
interest in the transaction is 6.94% payable semi-annually and the corporate tax rate is
30%. Silversands Manufacturing Company Ltd. has a policy of depreciating machines
of this type over a four year period on the straight line basis.
Assume the lease is to be capitalized.
Required:
(i) Show how the above transactions will be reflected in the profit and loss account of
Silversands Manufacturing Company Ltd. for each of the four years ending 31 December
2005, 2006, 2007 and 2008. (8 marks)
(ii) Balance sheet extracts of Silversands Manufacturing Company Ltd. as at 31 December
2005 and 2006. (6 marks)
(use the acturial method to allocate the interest charge) (Total: 20 marks)
QUESTION THREE
Zima Ltd. a manufacturing company, started experiencing heavy annual trading losses four years
ago. Both the shareholders and creditors of the company have accepted the reconstruction of
the company by forming a new company, to be named RTD Ltd. to take over Zima Ltd.
The balance sheet of Zima Ltd. as at 30 June 2004 is provided below:
Zima Ltd.
Balance sheet as at 30 June 2004
Sh. million Sh. million
Assets:
Non-current assets:
Land and buildings 820
Motor Vehicles 680
Goodwill 350
Furniture and equipment 435
Patents 185
2,470
Current assets:
Stock 380
Debtors 280
660
Equity and Liabilities: 3,130
Ordinary share capital (Sh. 10 each) 2,000
10% preference4 share capital (Sh. 10 each) 1,000
Share premium 400
Profit and loss account (850)
2,550
Non current liability:
8% debentures 400
Bank overdraft 30
Trade creditors 150 180
3,130

1. RTD Ltd. was formed with an authorized share capital of 300 million ordinary shares of sh.
10 each.
2. The ordinary shareholders of Zima Ltd. received three ordinary shares in RTD Ltd. for
every five shares held in Zima Ltd. The shares from RTD Ltd. were credited at Sh. 6 paid
each. The shareholders were to pay cash to RTD Ltd. to make the shares fully paid
immediately on receipt of the shares.
3. The 10% preference shareholders received four ordinary shared in RTD Ltd. for every five
preference shares in Zima Ltd. The ordinary shares from RTD Ltd. were credited in Sh. 8
paid each and the shareholders were to pay cash to RTD Ltd. to make these shares fully paid
immediately on receipt of the shares.
4. Dividends on the 10% preference shares were four years in arrears as at 30 June 2004 and
RTD Ltd. accepted to settle the amount due by issuing two fully paid ordinary shares and
Sh. 100 6% debentures for every Sh. 800 of the dividend in arrears.
5. The debenture holders accepted 25 ordinary shares for every Sh.200 of the debentures, the
shares being credited at Sh.8 paid each. The debenture holders would introduce cash to
make the shares fully paid on receipt of the shares.
6. The assets were transferred to RTD Ltd. at the following values:
Sh. million
Motor vehicles 550
Furniture and equipment 430
Patents 140
Stocks 280
Debtors 250
Goodwill was presumed to have no value and was therefore to be written off.
7. RTD Ltd. paid Sh. 30,000,000 to Zima Ltd. to pay for dissolution costs. This amount was
treated as preliminary expenses and was to be written off against profits in the following
three years.
8. Immediately after acquiring Zima Ltd. RTD Ltd. purchased trading stock worth Sh. 60
million in cash and settled Sh.50 million of the trade creditors balance.
9. All the transactions were completed on 1 July 2004.
Required:
(a) The necessary accounts to close the books of Zima Ltd. (10 marks)
(b) Journal entries in the books of RTD Ltd. to record the acquisition of Zima Ltd. (6 marks)
(c) Opening balance sheet of RTD Ltd. as a 1 July 2004. ( 4 marks)
(Total: 20 marks)
QUESTION FOUR
Wateja Ltd. a general trading company, has produced the following draft accounts, prepared on
the basis of historical costs, for the year ended 31 December 2003:
Income statement for the year ended 31 December 2003

Sh. ‘000’ Sh. ‘000’
Sales 16,500
Cost of sales:
Opening Inventory 2,200
Purchases 12,100
14,300
Closing inventory (2,500) (11,800)
Gross profit 4,700
Depreciation 340
Operating expenses 1,080
Interest payable 180 (1,600)
Tax (1,200)
Proposed dividends (800)
Retained profits 1,100
Retained profits brought forward 5,700
Retained profits carried forward 6,800
Balance sheet as at 31 December

2003 2002
Sh. ‘000’ Sh. ‘000’
Assets
Non current assets
Land and buildings: Cost 7,000 7,000
Depreciation (200) (160)
Fixtures and fittings: Cost 3,000 3,000
Depreciation (1,050) (750)
Inventory 2,500 2,200
Accounts receivable 2,900 2,700
Cash 1,700 160

Retained profits 6,800 5,700
Shareholders funds 8,800 7,700
6% loan stock 3,000 3,000
Accounts payable 2,050 1,800
Tax payable 1,200 1,050
Dividends proposed 800 600
1. Land and buildings were acquired on 1 January 1999. The split of total cost is estimated
as land, Sh. 5 million and buildings, Sh. 2 million. Buildings are depreciated at 5% per
annum on a straight line basis.
Estimated open market values are as follows:

31 December 2003 31 December 2002

Sh. ‘000’ Sh. ‘000’
Land 16,000 14,000
Buildings 6,300 6,000
22,300 20,000
2. Fixtures and fittings were acquired on 30 June 2000 and are depreciated at 10% per
annum on straight line basis. Suitable indices for current cost accounting are as follows:
30 June 2000 122

31December 2003 173
Any depreciation adjustment should be based on average values.
3. Inventory, accounts receivables and accounts payable at each balance sheet date are
estimated to have been in existence for an average of two months. Suitable indices are
provided below:
31 October 2002 132

31 October 2003 144
4. During the year ended 31 December 2003, the retail price index showed the following
movements:

Average for year 2003 131
5. The company has produced supplementary current cost account since incorporation.
At 31 December 2002, the balance on the current account cost reserve was Sh.
14,864,000.
Required:
(a) Current cost income statement for the year ended 31 December 2003. (10 marks)
(b) Current cost balance sheet as at 31 December 2003. (10 marks)
(Total: 20 marks)
QUESTION FIVE
(a) With reference to IAS 36 (Impairment of Assets), identify any four circumstances that
may indicate that an asset has been impaired. (4 marks)
(b) In the context of the International Accounting Standards Board’s Framework for the
Preparation and Presentation of financial statements, identify and briefly explain any
four qualitative characteristics of financial statements. (8 marks)
(c) The following information is extracted from the books of Viwanda Ltd. for the year
ended 31 March 2004:
Sh. Sh.
Million Million
Sales:
Food Products 5,650
Plastic and packaging 625
Pharmaceutical 345
Others 162 6,782
Expenses:
Food products 3,335
Plastics and packaging 425
Pharmaceuticals 222
Others 200 4,182
Other items:
General operating expenses 562
Income from investments 132
Interest expenses 65
Identifiable assets:
Food products 7,320
Plastics and packaging 1,320
Pharmaceuticals 1,050
Others 665 10,355
General assets: 722
1. Inter-segment sales for the year ended 31 March 2004, were as follows:
Sh. Million
Food products 55
Plastics and packaging 72
Pharmaceuticals 21
Others 7
2. Operating profit includes Sh. 33,000,000 on inter-segment sales.

3. Information about inter-segment expenses is not available.
Required:
Segmental financial information, in conformity with the requirements of IAS 14 (segment
reporting), for the year ended 31 March 2004. (8 marks)
(Total: 20 marks)

CPA PART III
JUNE 2005. Time allowed: 3 hours
QUESTION ONE
On 1 May 2002, Leo Ltd. acquired 75% of the issued ordinary shares of Jana Ltd. On that date,
Jana Ltd. had revenue reserves ofSh.300 million.
On 1 May 2001, Leo Ltd. had acquired 30% of the issued ordinary shares of Poke a Ltd. when
the latter had revenue reserves of Sh.I00 million. Leo Ltd. exercises significant influence on
Pokea Ltd. and has appointed two directors to the board of Pokea Ltd.
Jana Ltd. acquired 80% of the issued ordinary shares of Wetu Ltd. on 1 November 2000 when
the revenue reserves of Wetu Ltd. were Sh.125 million. The revenue reserves balance of Wetu
Ltd. on 1 May 2002 was Sh.200 million.
The financial statements of Leo Ltd. and its subsidiary and associate companies for the financial
year ended 30 April 2005 are as follows:
Dividends:
Paid Proposed
Income statements for the year ended 30 April 2005
Leo Ltd. Jana Ltd. Wetu Ltd. Pokea Ltd.
Sh. million Sh. million Sh. million Sh. million
Sales 2,680 1,160 750 480
Cost of sales (1,872) (810) (525) (330)
Gross profit 808 350 225 150
Dividend received 36 20 - -
844 370 225 150
Operating expenses (365) (135) (98) (60)
Profit before tax 479 235 127 90
Tax (185) (75) (37) (30)
294 160 90 60
Extra Ordinary item 28 (16) - -
322 144 90 65
Dividends: paid (120) (40) (25) (20)
Proposed (80) (20) (20) (10)
Retained Profit 122 84 45 35
Balance sheets as at 30 April 2005

Leo Ltd. Jana Ltd. Wetu Ltd. Pokea Ltd.
Assets:
Property, plant and equipment 2,850 1,330 1,470 810
Investment in Jana Ltd. at cost 1,800
Investment in Pokea Ltd at cost 236
Investment in Wetu Ltd. at cost 1,000
Goodwill 100
Loan to Pokea Ltd 200
Current assets 844 400 370 230
Total assets 5,390 2,730 1,840 1,140

Capital and liabilities:
Ordinary share capital 3,000 1,000 600 400
Share premium 1,000 500 300 100
Revenue reserves 680 420 360 280
4,680 1,920 1,260 780
Loans from third parties 800 500 300
Loan from Leo Ltd. 200
Current liabilities 450 310° 280 160
Total capital and liabilities 5.930 2.730 1.840 1.140
1. During the year ended 30 April 2005, Jana Ltd. made sales of Sh.500 million to Leo Ltd.
at a profit of 25% on cost.Sh.50 million of these goods were include in the closing stock
of Leo Ltd. Included in the opening stock of Leo Ltd., were goods purchased from Jana
Ltd. 31,'1 on which Jana Ltd. had made a profit of Sh.6 million. All the intra-group
opening stock was disposed of during the period.
2. Leo Ltd. made sales of Sh.90 million to Pokea Ltd. during the year at a profit of 20% on
selling price. One third of the goods purchased by Pokea Ltd. from Leo Ltd. in the
period was included in the closing stock as at 30 April 2005.
3. As at 1 May 2002, property, plant and equipment owned by Jana Ltd. Were revalued
upwards by Sh.200 million. This revaluation has not yet been incorporated in the books.
These property, plant and equipment are still owned by the company. Depreciation is
provided on the assets at the rate of 10% per .annum on the straight line basis from the
date Leo Ltd. acquired its holding in Jana Ltd
4. Leo Ltd purchased the shares in Pokea Ltd. Cum-dividend. The dividends were
subsequently paid by Pokea Ltd. In this respect, Leo Ltd. Received Sh.6 million
dividends from Pokea Ltd. And credited the amount to it’s income statement for the
year ended 30 April 2002
5. Leo Ltd. does not amortise the goodwill arising on acquisition of subsidiaries but
instead determines the impairment of the goodwill occurring in a period which it
charges to the group income statement.
The method is applied to premium arising on investment in an associate company.
For the year ended 30 April 2005, impairment of goodwill was determined as follows:
Sh. Million
Goodwill arising on acquisition of Jana Ltd 64
Share of goodwill arising on acquisition of Wetu Ltd. by Jana Ltd. 14
Premium arising on investment in Pokea Ltd. 10

Total impairment of goodwill and premium provided for up to 1 may 2004 was as
follows:
On goodwill arising on acquisition of Jana Ltd. 116
On share of goodwill arising on acquisition of Wetu Ltd. 40
On premium arising on investment in Pokea ltd. 30
6. Included in the current assets of Leo Ltd. is Sh.80 million due from Jana Ltd. liabilities
of Jana Ltd.
7. The companies have not accrued their share of proposed dividends from either their
subsidiary or associate companies.
Required:
(a) Group income statement for the year ended 30 April 2005. (13 marks)
(b) Group balance sheet as at 30 April 2005. (12 marks)
The financial statements above should comply with the requirements of:
IFRS 3 - Business Combinations
IAS 28 - Accounting for Investments in Associates
(Total: 25 marks)
QUESTION TWO
Shida Ltd. reported favourable trading results until three years ago when it started reporting
successive trading losses.
Provided below is the balance sheet of the company as at 30 September 2004:

Sh. ‘000’ Sh. ‘000’
Assets:
Non-current assets:
Goodwill 20,000
Land and buildings 48,000
Motor vehicles 37,000
Furniture and equipment 25,000 130,000
Current assets:
Stock 18,000
Debtors 6,500 24,500
Total assets 154,500
Ordinary share capital 50,000
10% preference share capital 30,000
Share premium 10,000
Profit and loss account balance (30,000) 60,000
Non-currency liability:
6% debentures 70,000
Creditors 14,500
Total equity and liabilities 154,500
1. Both the ordinary and preference shares are of Sh.l0 each and are all fully paid.
2. On 30 September 2004, preference dividends were three years in arrears.
3. Debentures are secured on a floating charge over the assets of the company. Debenture
holders who are also suppliers of goods to the company are owed Sid 3 million. This
amount is included in the creditors account.
4. The bank overdraft is secured on a fixed charge on motor vehicles.
5. The articles of association of the company give preference shareholders priority over
ordinary shareholders on repayment of the capital contributed. The articles of
association also provide for repayment of contributed capital only after settlement of
any preference dividend arrears outstanding.
6. Due to successive trading losses that the company has reported in the past three years,
the directors have decided either to liquidate or reconstruct the company.
The realisable values of the company's assets as at 30 September 2004 were as follows:
Sh. ‘000’
Furniture and equipment 15,000
Stock 12,500
Debtors 5,200
On liquidation of the company, dissolution costs of Sh. 5 million would be incurred.

7. On reconstruction of the company, the following measures would be effected:
• The authorised capital of the company would be increased from Sh.80 million to
Sh.150 million composed of ordinary shares of Sh.l0 each.
• 6% debentures of nominal value Sh 50 million would be settled by the issue of
ordinary shares at par fully paid. The balance of the 6% debentures would be
exchanged for 8% debentures of the same nominal value. The trade debt due to
debenture holders would be settled immediately in cash.
• The 10% preference shareholders would be issued with two fully paid ordinary
shares of Sh.l0 each for every five 10% preference shares held.
• Preference dividend arrears would be settled by the issue of five fully paid ordinary
shares for every Sh.l00 of the arrears.
• Present ordinary shareholders would be issued with one fully paid ordinary share
of Sh.10 for every ten ordinary shares held.
• It is estimated that in order to effect the scheme of reconstruction, a cost of Sh.4
million would be incurred.
8. On reconstruction of the company, 4,850.000 ordinary shares of Sh.10 par value and
paid for immediately, would be issued to the present ordinary shareholders and 10%
preference shareholders in the ratio of four to one respectively. The cash received from
the issue of the shares wou1d be used to purchase trading stock valued at Sh.12 million,
settle the bank overdraft and pay the trade debt due to the debenture holders. The
balance would be used as working capital.
9. It is anticipated that on reconstruction, the company would make an annual profit
before interest and tax of Sh.9,100,000. The tax rate is expected to be 30%.
In order to compensate the present shareholders for the loss they would incur on
reconstruction of the company, the directors have decided to retain only 20% of the
anticipated net profit.
10. Assume that all the transactions on reconstruction were completed on 1 October 2004.
Required:
(a) The amount the present ordinary and preference shareholders would receive on
liquidation of Shida Ltd. (6 marks)

(b) The opening balance sheet of Shida ltd. as at 2 October 2004, after completion of the
reconstruction. (14 marks)
(Total: 20 marks)
QUESTION THREE
XYZ Ltd. is a company quoted on the stock exchange. It owns several subsidiary companies and
during the year ended 31 May 2005, it sold off a loss-making subsidiary company.
The draft group financial statements for the year ended 31 May 2005 are as follows:
Consolidated income statement for the year ended 31 May 2005

Sh. million
Revenue 5,145
Gross profit 1,715
Other incomes 69
1,784
Operating expenses (1,065)
Finance costs (68)
Profit before tax 651
Income tax expense (202)
Profit for the year 449
Profit for the year attributable to the holding company 423
Profit for the year attributable to the minority interest 26
449
Extract from the consolidated statement of changes in equity (Retained profits)
Sh. million
Retained profit brought forward 268
691
Interim dividend paid (120)
Retained profits carried forward 571
Consolidated balance sheets as at 31 May:

2005 2004
Non-current assets:
Goodwill 42 48
588 568
Current assets:
Inventories 623 842
Accounts receivable 354 479
Cash in hand and at bank 71 59
Ordinary share capital 300 300

Revaluation reserve 150 170
Retained profits 571 268
1,021 738
Minority interest 188 260
Shareholders funds 1,209 998
10% debentures - 200
Obligations under finance leases 40 48
Deferred tax 40 64
Bank overdraft 6 123
Accounts payable 281 378
Obligations under finance leases 28 24
Current tax 8 9
Proposed dividend ___- _72
1. XYZ Ltd. had acquired 75% of the ordinary share capital of the subsidiary company five
years ago and goodwill arising on acquisition of Sh.30 million was being amortised over
five years. In the year of sale, no goodwill was amortised in the financial statements in
line with the new accounting treatment of goodwill. Only 4 years amortisation had been
provided on the subsidiary's goodwill.
2. The values of the assets and liabilities of the subsidiary company at the time of disposal
were:
Sh. million
Property, plant and equipment 132
Inventory 193
Accounts receivable 112
Cash 28
Accounts payable (81)
Taxation (4)
3. During the year ended 31 May 1005, the group sold other property, plant and
equipment having a net book value o Sh.13 million for Sh.25 million. The group also
purchased other property, plant and equipment at a cost of Sh.243 million, 60 million of
which was by means of finance leases.
Expenses include the depreciation charge provided for the year up to the date of sale, of
Sh. 9 million, on the property, plant and equipment of the subsidiary company disposed
of.
4. Other incomes include Sh.59 million which was reported as profit on the sale of the
subsidiary company. The balance is investment income received.

5. Obligations under 'finance leases (reported under current liabilities), include an accrued
interest of Sh.2 million as at 31 May 2005.
6. Proposed dividends as at 31 May 2004 include Sh.12 million for minority interest.
Required:
Consolidated cash flow statement, in accordance with the requirements of IAS - 7 (Cash Flow
Statements), for the year ended 31 May 2005. Use the direct method of presenting cash from
operating activities. (20 marks)
QUESTION FOUR
The directors of Alpha Ltd., a private limited company, are planning to sell the company in the
near future. Prior to doing this, however, they wish to put a value on the equity shares of the
company. The balance sheet of Alpha Ltd. as at 31 December 2004 was as follows:
Sh. Sh.
`000’ `000’
Share capital: Issued and Subscribed Fixed assets (net book value)
20,000,000 equity shares of Sh.10 Land and building 500,000
each fully paid 200,000 Plant and machinery 275,000
Revenue reserve 595,000 Motor vehicles 55,000
Long term liability: Current assets:

Secured loan Stock in trade 133,000
(secured on land and building) 150,000 Sundry debtors 145,000
Current liabilities: Cash at bank 15,000
Trade expenses and creditors 135,000 Miscellaneous expenses and
Taxation 45,000 losses not written off:
Preliminary expenses 2,000
1,125,000 1,125,000
1. The reported profits of Alpha Ltd. (after tax and interest but before dividends), over the
last five years have been as follows:
Sh
Year '000'
1 80,000
2 75,000
3 95,000
4 80,000
5 85,000
2. The average annual gross dividend over the last ten years has been Sh.30,000,000.
3. The directors of Alpha Ltd. have estimated that the after tax profit for the year ending
31 December 2005 will be Sh.85,000,000. Thereafter, the directors have estimated that
the after tax profit will increase by 5% per annum over the next four years.
4. A valuation of the assets of Alpha Ltd. as at 31 December 2004 disclosed the following:
Sh.
'000'
Land and building 610,000
Plant and machinery 288,000
5. A study of three public companies in the same industry as Alpha Ltd. shows that the
average dividend yields and price earnings (PIE) ratios over the last three years have
been:
Beta Ltd Omega Ltd. Zeta Ltd.

Dividend P/E Dividend P/E Dividend P/E
Year Yield (%) Ratio Yield (%) Ratio Yield (%) Ratio
1 17 8.50 16.5 9.00 17.0 8.00
2 15 9.00 17.0 10.00 17.0 8.00
3 18 10.00 17.5 11.50 17.0 9.00
Average 16.7 9.17 17.0 10.17 17.0 8.33
6. One director of Alpha Ltd. has estimated that the after tax cost of capital is 17.5%. The
estimated net cash flows of Alpha Ltd., after taking into consideration taxation and
capital expenditure, over the next five years are as follows:
Sh.
Year '000'
1 100,000
2 120,000
3 140,000
4 10,000
5 150,000
Another director of Alpha Ltd. is of the view that profitability should be measured at
12.5% on tangible capital and 17.5% on intangible capital.
Required:
Compute the value of one equity share of Alpha Ltd. as at 31 December 2004, using the
methods listed below. In each case, briefly comment on the value obtained:
(a) Net tangible assets method (4 marks)
(b) Dividend yield method. (4 marks)
(c) Price/Earnings method (4 marks)
(d) Capitalisation of earnings method (4 marks)
(e) Super profits method (4 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Outline the advantages of the development of a "conceptual framework for accounting"
(6 marks)
(b) In the context of the preparation of environmental reports and accounting for
environmental issues, state the information that should be included in an entity's
environmental report. (5 marks)
(c) Briefly explain the meaning of "corporate social reporting". (4 marks)
(Total: 15 marks)

CPA PART III
DECEMBER 2005 Time allowed: 3 Hours.
question. Show ALL your workings.
QUESTION ONE
Mzalendo Ltd., a company quoted on the Nairobi Stock Exchange, ahs a foreign subsidiary,
Mgeni Ltd., whose reporting currency is the Dime. The reporting currency of Mzalendo Ltd., is
the Kenya shilling (Ksh.). The financial statements of the two companies for the year ended 31
October 2005 were as follows:
Income Statements for the year ended 31 October 2005:

Ksh. “million” Dime “million”
Revenue 40,425 97,125
Cost of sales (35,500) (77,550)
Other income 277 200
5,202 19,775
Distribution costs (2,640) (3,159)
Administration expenses (1,640) (2,100)
Finance cost (120) (600)
Profit before tax 802 13,925
Tax expense (300) (4,725)
Dividends: Interim paid (300) (1,448)
Final proposed (400) (2,304)
Retained profit for the period (198) 5,448
Balance Sheets as at 31 October 2005:

Ksh. “million” Dime “million”
Non-current assets:
Property, plant and equipment 3,240 4,860
Investment in Mgeni Ltd. 470 -
3,710 4,860
Current assets:
Inventory 1,990 8,316
Cash at bank 240 2,016

Ordinary share capital 118 1,348
Retained profits 502 9,260
620 10,608
12% loan stock 1,000 4,860
Current tax 50 60
Proposed dividends 400 2,304
1. Mzalendo Ltd. Acquired 75% of the ordinary share capital of Mgeni Ltd. On 1 November
2002 when the retained profits of Mgeni Ltd. Were Dime 2,876 million. The goodwill
arising on the acquisition of Mgeni Ltd., is considered to be an asset of Mgeni Ltd. No
amortisation of goodwill is charged on profits.
2. Other income reported by Mzalendo Ltd., is made up of interim dividend received from
Mgeni Ltd., Mgeni Ltd., aid the dividend on 15 July 2005. Other income reported by
Mgeni Ltd. is made up of the exchange gain on retranslating the 12% loan stock. The loan
stock was obtained form a foreign country.
3. During the year ended 31 October 2005, Mzalendo Ltd., sold goods worth Ksh.900 million
to Mgeni Ltd. Mzalendo Ltd. Reported a profit of 25% on cost. Half of these goods were
still in the inventory of Mgeni Ltd. As at 31 October 2005.
4. The relevant exchange rates at select dates were as follows:
Date Dime to 1 Kenya Shilling

1 November 2002 4.40
31 October 2004 4.00
15 July 2005 3.92
31 October 2005 3.60
Average for the year ended 31 October 2005 3.75
Required:
a) Consolidated income statement for the year ended 31 October 2005 in Kenya Shillings.
(13 marks)
b) Consolidated balance sheet as at 31 October 2005 in Kenya Shillings. (12 marks)
(Round the figures to the nearest 1 million where necessary) (Total: 25 marks)
QUESTION TWO
Biashara Ltd. Operates in a business environment where prices have had a consistent upward
trend in the past years. The company has therefore adopted a policy of supplementing historical
cost accounting financial statements with current cost accounting financial statements.
Provided below are the financial statements of the company for the dates shown.

Biashara Ltd.
(Current cost accounting basis)
Sh. ‘000’ Sh. ‘000’
Assets:
Non-current assets:
Land 2,500
Buildings 6,600
13,900
Current assets:
Stock 610
Debtors 860
Bank balance 150
1,620
15,520
Preference share capital 2,000
Share premium 1,000
Retained earnings 2,270
11,520
Loan 3,000
Creditors 380
Current tax 170
Interest payable 150
1,000
15,520
(Historical cost accounting basis)
Sh. ‘000’ Sh. ‘000’
Sales
Opening stock 600
Purchases 23,620
24,220
Closing stock 560
23,660
Gross profit 10,140
Expenses:
Depreciation 1,580
Interest on loan 250
Other operating expenses 5,480
7,310
Profit on disposal of a motor vehicle 50
Tax 870
Dividends paid:
Preference 100
Ordinary 200
Dividends proposed:
Preference 100
Ordinary 300
700
Retained profit 1,310
Additional Information:
1. On 30 September 2004, the company sold a motor vehicle at a profit of Sh.50,000. The
motor vehicle had cost Sh.1 million and had accumulated depreciation of Sh.400,000 by the
date of sale.
No depreciation was provided on the vehicle in the year of sale and the price index on the
date of sale was 108.
2. The company issued ordinary shares of a nominal value of sh.2 million at a premium of 25%
on 30 September 2004.
The shares issued did not rank for dividend in the year ended 31 December 2004.
3. The following information is relevant in relation to the non-current assets of the company:

Buildings Motor vehicles

Historical cost accounting
Cost Sh.10 million Sh.6.4 million
Accumulated depreciation
On 31 December 2003 Sh.4 million Sh.2.56 million
Index
On date of purchase 100 80
On 31 December 2003 110 100
On December 2004 120 110
Land was purchased at a cost of sh.2.2 million and had a market value of Sh.2.75 million on
31 December 2004.
All motor vehicles, including the one sold on 30 September 2004, were purchased on the
same date.
4. The company provides for depreciation on the non-current assets on cost using the straight
line method at the following rates per annum:
Buildings - 5%
Motor vehicles - 20%
The depreciation adjustment for current cost accounting is based on the year end current
cost values.
5. The average age of stocks is one month and the following are the relevant prices indices on
selected dates:
Index
30 November 2003 120
30 November 2004 140
The average index for the year ended 31 December 2004 was 132.
The company applies the same indices on stocks and monetary working capital (which
includes bank balances).
6. On 1 July 2004, the company made a loan repayment of sh.1 million.
7. The company had the following balances in its books as at 31 December 2004:
Sh. ‘000’
Debtors 750
Creditors 560
Bank balance 5,590
Current tax 240
Required:
a) Current cost accounting profit and loss account for the year ended 31 December 2004.
(10 marks)
b) Current cost accounting balance sheet as at 31 December 2004. (10 marks)
(Total: 20 marks)
QUESTION THREE
Delta Ltd., a private limited company, decides to raise funds for the expansion of its operations
by floating its ordinary shares to public. Mhasibu and Associates, a firm of Certified Public
Accountants, was contracted to prepare the accountants report to appear in the prospectus.
The following information has been provided with respect to Delta Ltd.,
1. Extracts from the accounts of Delta Ltd. For the last five financial years ended 30 June
2005:
2001 2002 2003 2004 2005

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Turnover 9,650 10,700 12,700 15,300 17,500
Cost of sales 7,720 8,560 10,160 12,240 14,000
Administration costs 480 520 550 580 620
Selling and
distribution costs 298 390 410 470 510
Finance costs 180 180 240 300 300
Tax 302 330 400 530 650
Ordinary share capital
(Sh.10 par value) 8,000 8,000 10,000 10,000 10,000
2. Balance Sheet as at 30 June 2005
Sh. ‘000’ Sh. ‘000’

Assets
Non-current assets:
Freehold property (at valuation) 12,000
Plant and machinery (at cost less depreciation) 6,000
Motor vehicles (at cost less depreciation) 4,800
Furniture (at cost less depreciation) 1,500
24,300
Current assets:
Stock (at lower of cost and net realisable value) 2,800
Debtors (net of provision for doubtful debts) 1,600
Quoted investments (at market price) 650
Bank balance and cash in hand 150
5,200
Total assets 29,500


Share premium 4,000

Revaluation reserve 2,000
Investment price fluctuation reserve 190
Profit and loss account balance 3,850 20,040
6% Debentures 5,000
Bank loan 850
Deferred tax 1,950 7,800
Current liabilities: 710

Trade creditors 550
Current tax 400
Proposed dividends 1,660
3. On June 2003, the company received a sales order of Sh.300,000 and immediately invoiced
the customer for the value of the goods. The amount of the sales order was recorded as
sales for the month of June 2003.
The goods were excluded from the closing stock on 30 June 2003 and delivered to he
customer on 2 July 2003. The policy of the company is to recognise a sale when goods are
delivered to a customer. The company charges a profit margin of 25% on cost.
4. Due to a technical problem in June 2005, a sale of Sh.253,000 was incorrectly recorded in
both sales account and sales ledger as Sh.235,000. The error is yet to be corrected.
5. Stock taking errors resulted in the overstatement of closing stock by Sh.150,000 on 30 June
2004 and the understatement of closing stock by 180,000 on 30 June 2005.
6. A vehicle which had cost Sh.500,000 and had an accumulated depreciation of Sh.150,000 on
30 June 2003 was withdrawn from use on 1 July 2003 pending re-conditioning and
subsequent sale.
The vehicle has, however, not been sold. Despite not being used, the vehicle has been
subjected to depreciation at the rate of 10% per annum based on cost.
Depreciation of the vehicle is included in the selling and distribution costs.
7. On 2 January 2003, the company issued 200,000 ordinary shares ofSh.10 each to a private
investor at fair value. The shares issued ranked for dividend in the year ended 30 June 2003
at 50% of the normal dividend rate.
8. Quoted investments were sold in August 2005 and the proceeds used to repay the bank
loan.
All the investment income reported in the five years had been generated form these
investments.
9. Investment price fluctuation reserve attributable to investments sold is treated as realised on

sale of the investments.
10. Depreciation is provided on the non-current assets on a straight line basis on cost or
valuation at the following rates.
Plant and machinery - 5% per annum

Motor vehicles - 10% per annum
Furniture - 12.5 per annum
11. Mhasibu and Associates (Certified Public Accountants), have been auditors of the company
for the past three years ended 30 June 2005. Prior to the appointment of Mhasibu and
Associates, Mkaguzi and Associates (Certified Public Accountants), were the auditors of the
company for many years.
12. The company has an authorized share capital of sh.20 million composed of 2 million
ordinary shares of sh.10 each.
All the issued ordinary shares of the company are fully paid.
13. The turnover is the net aggregate amount receivable for goods supplied and services
rendered net of value added tax.
14. The company makes both domestic and export sales. The export sales in the five years
ended 30 June 2005 were as follows:
2001 2002 2003 2004 2005

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Export sales 3,800 4,500 5,200 6,400 7,200
All export transactions were denominated in Kenya shillings.
15. Professional valuation carried out in June 2005 estimated the value of the freehold property
at Sh.13.5 million.
16. On 30 June 2005, the company had capital commitments of Sh.8 million of which sh.6
million had been contracted for.
Required:
Accountants report for inclusion in the prospectus. (20 marks)
QUESTION FOUR
Provided below are the consolidated income statement and the consolidated income statement
and the consolidated balance sheet of Leta group for the financial year ended 31 October 2005.

Leta Ltd.
Consolidated income statement for the year ended 31 October 2005:
Revenue 5,106
Cost of sales 3,628
Gross profit 1,478
Other incomes: Share of profit after tax in associate company 40
Investment income 50 90
1,568
Expenses: 250
Distribution costs 528
Administration expenses 150 (928)
Finance costs 640
Profit before tax expense (280)
Profit attributable to: the holding company 330
The minority interest 30
360
Leta Ltd.
Consolidated balance sheet as at 31 October 2004
2005 2004
Sh. ‘000’ Sh. ‘000’
Non-current assets:
Intangibles (including goodwill) 500 400
Investments: Others - 50
Investment in associate company 130 100
1,390 1,160
Current assets:
Inventories 300 204
Receivables 780 630
Short term investments 100 -
Cash in hand 4 2

Retained profits 200 182
350 240
Minority interest 1,270 1,022
100 60
Long-term loan 340 100
Current liabilities
Trade payables 454 398
Bank overdraft 170 196
Taxation 240 220
1. During the year ended 31 October 2005, Leta Ltd. Acquired 80% of the share capital of Pili
Ltd. The assets of Pili Ltd. Were as follows as at the date of acquisition:
Sh. ‘million’
Inventory 80
Receivable 60
260
Long-term loan (50)
Payables (80)
Bank balance (20)
Taxation (10)
100
2. The total purchase price was sh.90 million paid by issuing Sh. 20 million worth of shares at
par value. The balance was paid in cash.
3. Some items of plant with an original cost of Sh.170 million and a net book value of Sh.90
million were sold for Sh.64 million during the year ended 31 October 2005. The
investments were sold for Sh.60 million during the same period.
The following information relates to property, plant and equipment.
31 October 2005 31 October 2004

Sh. ‘000’ Sh. ‘000
Cost 1,440 1,190
Depreciation (680) (580)
760 610
The cost of plant of Pili Ltd. On the date of acquisition was Sh.200 million and depreciation
was Sh.80 million. During the year ended 31 October 2005, there was a revaluation gain of
Sh.20 million attributable to the holding company’s plant.
Required:
Consolidated cash flow statement, in conformity with IAS7 (Cash Flow Statement), for the year
ended 31 October 2005 using the indirect method of presentation. (20 marks)
QUESTION FIVE
a) Outline the merits of including a value added statement in the annual financial reports of a
company (4 marks)
b) The information below relates to Ujuzi Limited, a company listed on the Nairobi Stock
Exchange, for the year ended 30 June 2005.

Sh. ‘000’
Turnover 25,160
Salaries and wages 6,800
Taxation for the year 2,040
Dividends 816
Depreciation 1,360
Water, power and insurance 2,040
Finance charge on leases 680
Required:
Using the two alternative approaches to the treatment of depreciation, prepare value added
statements for the year ended 30 June 2005. (8 marks)
c) Outline the nature and purpose of segmental reporting. (3 marks)

(Total: 20 marks)
Answers – Past Papers
JULY 2000
QUESTION ONE
(a) Basic earnings per share
2000 1999
(i) Basic earnings
Profit after tax and extraordinary items 9,320,000 8,910,000
Preference dividends (800,000) (800,000)
8,520,000 8,110,000
(ii) Weighted average number of ordinary shares
movement
1998/1999 Shares outstanding 2,500,000
Additional due to split 7,500,000
10,000,000
1999/2000 Shares outstanding 2,500,000
1.4.99 Additional due to share split 7,500,000
10,000,000
1.12.99 Issue 3,000,000
2.12.99 Exercise of option 200,000 x 4 800,000
13,800,000
Tutorial Note
(i). The share split affects retrospectively all arrangements that existed prior to the share split.
(ii). The exercise of the option by the directors is at a concessionary price of Sh.3 (Sh.12÷4)
Therefore there is a bonus element which requires adjustment by the factor.
Fair value per share prior to exercise of options

Theoretical ex-option price
Where, Theoretical ex-right price =
13000000(6) + 800000(3) = 5.80

13000000 + 800000
__6__ = 1.034
5.80

94 Answers – Past Papers
Weighted ordinary number of ordinary shares.

1999/2000
1.4.99 to 1.12.99 (10000000 x 1.034 x 8/12) 6,893,333
2.12.99 to 31.3.00 13800000 x 4/12 4,600,000
11,493,333
1998/1999
1.4.98 to 31.3.99 10,000,000 x 1.034 10,440,000
2000 1999
Basic earning per share 8520000 8,110,000
11493333 10,340,000
= 74 cents 78 cents
Or
Basic earning per share 1999 restated 8,110,000 x 5.8 78 cents
10,000,000 6.
(b). Determining the degree of dilution of potential ordinary shares
Increase Increase in ordinary Incremental

in shares earnings per
earnings share
Options 0
Incremental earnings
Incremental shares issued for no consideration i.e.
(300,000 x 4 (split) x 2/5) 480,000 0
Convertible debentures
Incremental earnings i.e.(2,500,000 x 0.1 x 0.675) 168,750 - 0
Incremental shares (2,500 x 75 x 4 (split) - 750,000 0.225
Tutorial Note: Diluted E.P.S is computed starting with the most dilutive of the potential
ordinary shares to the least dillutive ordinary share.
Earnings Shares E.P.S

“Sh.” “Sh.”
As reported 8,520,000 11,493,333 0.74
Options - 480,000
8,520,000 11,973,333 0.71
Debentures 168,750 750,000
8,688,750 12,723,333 0.68
Diluted E.P.S. for 2002 is 68 cents
(c) (i). As a result of standardizing the basis of calculating earnings per share , it
provides investors and analysts with a useful comparative yardstick for assessing a
company’s performance over-time.
(ii). It may also serve as a crude measure of comparative performance between companies.
(iii). It forms the basis of computing the price/earning ratio of a business.
(iv). Diluted earnings per share figures assist users in assessing the impact of changes in
the capital structure.
QUESTION TWO
(i). Solution
Mifupa Ltd.
100%
1.5.99 75% (1.9.99)
Nyama Ltd. Mishipa
Ltd.
40% (2.9.99)
Ngozi Ltd.
(ii). Goodwill/premium arising on consolidation
Nyama Ltd. Mishipa Ltd. Ngozi Ltd.

Sh.’000’ Sh.’000’ Sh.’000’
Consideration 177,000 112,000 28,980
Less Pre-acquisition dividends
Nyama Ltd.
1440 x 75% x 4/12 (360)
Mishipa Ltd
Dividends received 360
(25% x 480) + 240
Dividend earned
(25% x 720) + (75% x 720 x 4/12) (360)
Ngozi Ltd.
Dividends received (108)…
(40% x 270)
Dividends earned
(540 x 40% x 4/12) ___________ ___________ 72
176,640 112,000 28,944
Less net assets acquired
Nyama Ltd.
(75% x 137,560) (103,170)
Mishipa Ltd
(75% x 74,000) (55,500)
Ngozi Ltd. (22,200)
1.1.99 40% x 55,500 (3,616)
8 months 40% x 13,560 x 8/12 _________ ________ _______
73,470 56,500 3,128

(iii) Turnover
Mifupa Ltd. 3,237,840
Nyama Ltd. 458,507
(8/12 x 687,760)
Mishipa Ltd. 45,600
(4/12 x 136,800) _________
3,741,947
(iv). Cost of sales
Mifupa Ltd 2,238,624
Nyama Ltd (8/12 x 489,312) 326,208
Mishipa Ltd (4/12 x 92,160) 30,720
2,595,552
(v) Expenses Sh.’000’

Mifupa Ltd. 248,736
Add understatement of depreciation 24
(150,000 – 126,000)
Nyama Ltd. (8/12 x 54,368) 36,245
Add profit or sales of assets netted 60
Mishipa Ltd. (4/12 x 10,240) 3,413
288,478
(vi) Profit of Associate

Mishipa Ltd.34,400 x 25% x 8/12 5,733
Ngozi Ltd.
25,800 x 40% x 4/12 3,440
9,173
(vii) Taxation 269,600

Mifupa Ltd.
Nyama Ltd. 40,667
(8/12 x 61,000)
Mishipa Ltd.
(4/12 x 15,600) 5,200
315,467
(viii) Tax of Associate

Mishipa Ltd. 2,600
(15,600 x 25% x 8/12)
Ngozi Ltd 1,560
(11,700 x 40% 4/12) _______
4,160
(ix) Minority interests

Nyama Ltd.
25% x 85,080 x 8/12 – 15 14,165
Mifupa Ltd. and the subsidiaries consolidated profit and loss account
For the year ended 31 December 1999
Sh.’000’ Sh.’000’
Turnover 3,741,947
Less cost of sales 2,595,552
Gross profit 1,146,395
Expenses (288,475)
Profit from operations 857,920
Interest income (4,800 x 8/12 x 2000) 6,133
Profit before taxation: Gross 864,053
Share of Associates 9,173
873,226
Taxation Group
Share of Associate 315,467
Profit after tax 4,160 (319,627)
Less minority interest 553,599
Profit attributed to members of the group (14,165)
Dividends 539,434
Preference
Ordinary (480)
- Interim
- Final 22,000
Retained profit for the year. 2,000 (24,000)
514,954
TUTORIAL NOTE
The ordinary dividends should be included in statement of changes in equity.
QUESTION THREE
(a) (i) Under the partial provision method, deferred tax assets and liabilities were recognised
where there was reasonable evidence that timing differences would reverse in the near
future. The original IAS 12 permitted an enterprise not to recognize deferred tax assets and
liabilities where there was reasonable evidence that timing differences would not reverse for
considerable period ahead.
IAS 12 revised requires an enterprise to recognize a deferred tax liability or (subject to
certain conditions) assets for all temporary differences with certain exceptions. IAS 12 is
consistent with the principles which underlie the recognition of assets and liabilities in the
balance sheet as laid down in the framework for the preparation and presentation of
financial statements.
As per the framework an asset is a resource controlled by the enterprise as a result of past
events and from which future economic benefits are expected to flow to the enterprise. A
liability is a present obligation of the enterprise arising from past events the statement of
which is expected to result in an outflow of resources embodying economic benefits.
The framework further provides the recognition criteria for assets & liabilities;
(a) If it is probable that any future economic benefits associated with the asset or
liability will fall to or from the enterprise.
(b) The asset or liability has a value that can be measured with reliability.

The partial provision approach regards only the limited future of the liability rather
than the complete life-span of the liability. This is an adhoc position rather than one
based on the principles laid down in the framework for recognition of liabilities. The
requirement of IAS 12 on the other hand, is consistent with the principles which
underlie the recognition of assets and liabilities in the balance sheet as laid down in
the framework for the preparation and presentation of financial statements.
(ii). International Accounting Standards permit certain assets to be carried at fair value
or to be revealed (examples in IAS 16, property and plant equipment. IAS 38,
Intangible assets, IAS 39, financial instrument Recognition and measurement and
IAS 40 investment property). In some jurisdictions, the revaluation or other
restatement of an asset to fair value affects taxable profit (tax loss) for the current
period. As a result the tax base of the asset is adjusted and no temporary differences
arises. In other jurisdictions, the revaluation or restatement of an asset does not
affect taxable profit in the period of the revaluation or restatement and consequently
the tax base of the asset is not adjusted. Nevertheless the future recovery of the
carrying amount will result in a taxable flow of economic benefits to the enterprise
and the amount that will be deductible for tax purposes will differ from the amount
of those economic benefits. The differences between the carrying amount of a
revalued asset and its base is a temporary difference and gives rise to a deferred tax
liability or asset. This is true even if;
(a) The enterprise does not intend to dispose of the assets. In such cases the
revalued carrying amount of the asset will be recovered through use and this
will generate taxable income which exceeds the depreciation that will be
allowable for tax purposes in future periods; or
(b) Tax on capital gains is deferred if the periods of the disposal of the assets are
invested in similar assets. In such cases the tax will ultimately become payable
on sale or use of the similar assets.
(b) Carrying Temporary

values Tax bases differences
Sh.’000’ Sh.’000’ Sh.’000’
Factory 150,000 22,500 127,500
Plant and Equipment 180,000 39,000 141,000
Investment in M. Ltd.
Buildings (factory) 1,500 300 1,200
Plant & Equipment 120 45 75
Inventory 372 342 30
Trade receivables (495) (315) (180)
Goodwill 150 Nil Not recognised
1997
Long term quoted investments 198,000 198,000 -
Current assets 45,000 45,000 -
Trade payables (40,500) (40,500) (900)
Provision for repairs (900) Nil 3,000
Long term loan (30,000) (33,000) Not recognised
Grant from World Bank 1,500 - 271,725
Deferred Tax Liability as at 30 June 2000

Taxable temporary
30%*272,802 81,841.50
Deducted temporary difference
30%*1080 (324)
81,517.50
Deferred tax charge in the income statement

Deferred tax liability as at 30.6.2000 81,517.50
Deferred tax liability as at 30.6.1999 (27,030)
54,487.50
Amount credited to deferred tax
Due to revaluation 30%*73500 22,050
Due to revaluation of M ltd (30% x 11250) (3375)
3,210
Made up as follows:
Adjustment on opening balance due to change in tax rate
27030 x 5/33 3,861
increase in temporary differences 30.6.00 271,725
revaluation arising due acquisition of M (73,500)
Ltd. temporary differences as at 30.6.95 (1,125)
27,030 (77,228.50)
0.35 32,100
QUESTION FOUR
(i) Dividends represent the income flow from an investment.
It is relevant to those investors who value actual cash inflow from an investment and not growth.
Earnings generated by the company are only significant to those investors if translated into
dividends.
1996 1997 1998 1999 20X0

Sh ‘000’ Sh ‘000’ Sh ‘000’ Sh ‘000’ Sh ‘000’
250 270 288 307 315

150 150 150 150 150
1.67 1.8 1.92 2 2.1
Average DPS = 1.67 + 1.8 + 1.92 + 2 + 2.1

= 1.898
5
Recommended value per share = DPS

R+P
Where P = Risk premium

r = normal rate of return

1.898
v= = Sh.10.5
0.12 + 0.06
Total value of Eama’s holding
= 3,000 x Sh 105 = Sh 315,000
(b)
Level of profitability expected increase in profit should be translated into increased dividends.
The dividend policy used by related companies in estimating required field you consider:
Yield on alternative investment

Market price – the yield generated should be in agreement with the prevailing market price.
Marketability – lack of marketability should be compensated by higher yields.
Other factors e.g tax level on investment income.
(i) Where shares acquired would generate controlling interest, the investor (Eama) is able to change
a premium over the market price of Sh. 1,050.
Acquisition by Athmang would guarantee controlling interest i.e above 50%
73,500 + 3,000
= x100 = 51%
150,000
Joint control by significant shareholders i.e B, C & D would also guarantee controlling interest
especially where a common voting system is adopted.
QUESTION FIVE
1. In identifying a business segment, the directors should consider the risk and returns of the
business segment products or services that have more or less the same risk and returns
should be grouped together separate from those with separate risk and returns.
The factors that they need to consider is grouping related products and services into
business segments are.
- Nature of products or services
- Nature of the productions process.
- The type of class of customers for the products or services.
- The methods used to distribute the products or provide the services
- If applicable, the nature of regulatory environment.
From the information it appears there are 2 business segments.

(1) Provision of flight services.
(2) Sale of holidays.
In identifying geographical segment, geographical regions that are subject to the same risk
and returns should be grouped together separate from those with difference risk and
returns.
In grouping geographical regions in to segments, the directors should consider.
- Proximity of operations.
- Similarity of political and economical conditions.

- Relationship between operations in different geographical areas.
- Special risk associated with operations in a particular area.
- Underlying currency risk and
- Exchange control registration.
From the information given, there appears to be 3-4 geographical segments.

(i) East Africa
(ii) Central Africa
(iii) Southern Africa
(iv) The Coastal regions of Kenya if the risk and returns associated with that regions are
different from those associated with East Africa generally.
2 In reporting the revenue of subsidiary and results under the relevant segment, total revenue,
external revenue, inter segment revenue, total result, inter segment result will have to be
disclosed.
A reconciliation of the same will have to be made where inter segment revenue and results
are eliminated. The basis of charging the routine maintenance and specialized work rendered
to their segment will have to be disclosed.
3 The exceptional loss has to be disclosed under Central Africa geographical segment if
geographical segment is the primary mode of reporting. However, where the business
segment is the primary mode of reporting the exceptional loss will have to be disclosed
under provision of flight services.
4 Information about this particular segment will have to be disclosed and the company will
have to comply with the requirements of IFRS 5.
5 As per IAS 14, an enterprise is required to show the segments share of profit or loss of
associates as well as the Investment in that associates. It is not required to show the
associate’s revenue nor associate’s assets.

DECEMBER 2000
QUESTION ONE
C LTD GROUP YEAR ENDING Sh.’000’ Sh.’000’
CONSOLIDATED P & L. as at 30.6.2000
Profit after taxation 18,768
Minority interest. (1,448)
17,320
Extra ordinary items – C. Ltd. (2,000)

- S. Ltd. 800
- Minority 80
Profit attributable to group members (1,280)
Dividends – Preference (1,200) 16,040
-- Ordinary (6,000)
Retained for year (7,200)
Brought forward 8,840
Carried forward 32,824
41,664
Consolidated Balance Sheet Sh’000
Tangible non current assets 92,000

Investment in associated undertakings _3,286
95,286
Loans due from associated undertakings 2,000
Net current assets _55,524
152,810
Preference shares 20,000
Reserves 41,664
Minority interests 21,146
Loans _10,000
152,810
QUESTION TWO
(a) The two approaches to the accounting treatment of government grants are:
(i). The capital approach – the grant is credited directly to shareholder’s interests;
(ii). The income approach – the grant is taken to income over one or more periods
The arguments in favour of the capital approach are:
1. The government grants are a financing device and should be dealt with as such in the
balance sheet rather than be passed through the income statement to offset the items of
The arguments in favour of the income approach are:

(a) Since government grants are receipts from a source other than shareholders, they should not
be credited directly to shareholders’ interests but should be recognized as income in
appropriate periods;
(b) Government grants are rarely gratuitous; the enterprise earns them through compliance with
their conditions and meeting the envisaged obligations; they should therefore be recognised as
income and matched with the associated costs which the grant is intended to compensate;
(c) As income and other taxes are charges against income, it is also logical to deal with
government grants, which are an extension of fiscal policies, in the income statement.
(d) A government grant that becomes receivable as compensation for expenses or losses already
incurred or for the purpose of giving immediate financial support to the enterprise with no
future related costs should be recognised as income of the period in which it becomes
receivable, as an extraordinary item if appropriate.
(c) Kenya Fisheries Limited

Balance Sheet as at 30 June Grant deduction from assets
Grant set up as deferred income:
Assets 1999 2000 1999 2000
Sh. m Sh. m Sh. m Sh.
m
Factory: Cost 200 200 Factory: Net cost 180 180
Accumulated Depreciation (40) (50) Accumulated (52) (65)
160 150 Depreciation 128 115
CREDIT SIDE: (No shareholders’ Funds)

Deferred income: FAO grant 128 Nil Deferred inc:/ FAO grant 48 Nil
(a) (a). FAO grant Account
F5 1995
1996 Jun. 30 P & K E8 13 Jul CB 100
1997 11 13 11 CB 80
1998 11 13
1999 11 13
Bal c/d 128 __
180 180
2000 CB
80 1999 F80
April 30F 8 x 100
10 Jul. b/d E48
8 x 80 64 2000
10 ___ June 30 P & L A/c ___
144 144

(b) FAO Grant A/c

1995 Sh.m 1995 Sh.
July Factory 100 July 11 CB 100
1996 June 30 P & L 8 July 11 CB
1997 11 8 80
1998 11 8
1999 11 8
June 30 c/d 48 ___
180 180
2000 1999
April 30 CB: Jul. Bal c/d 48
Factory 8/10 x 100 80 April 30 Factory 80
Electricity 8/10 x 64 11 P&L 16
144 144
Income statement for the year ended 30 June:
1999 1999 2000

Sh. m Sh. m Sh. m
Income FAO grant Depreciation (5) (5)
February: 100 x 1/20 5
Electricity: 80 x 1/10 8 Electricity (9) (11)
13 Deduct: FAO (8) (-)
Depreciation: Factory (200/20) (10) FAO grant (16)
FAO grant withdrawn
Kenya Fishers Ltd.

Grant set up as deferred income Grand deduction from asset
1999 2000 1999 2000
Dr. Assets Sh.m Sh.m Sh.m Sh.m
Factory: cost 200 200 Factory net cost 180 180
Depreciation (40) (50) (52) (65)
160 150 128 115
CR. Deferred income
FAO Grant 128 Nil FAO Grant 48 Nil
P & L Extracts 1999 2000 1999 2000
Sh.m Sh.m Sh.m Sh.m
Income FAO Grant
Factory 5 Depreciation (5) (5)
Electricity 8 Electricity (9) (11)
13 Deduct FAO (8) __
Dep: factory 10 (16)
FAO Grant withdrawn
QUESTION THREE
Zenoxide Limited Zenoxide Limited
Current Cost Balance sheet as at 30 Current Cost Profit and Loss account for the
September 1999 2000 year ended 30 September 2000
Sh. Sh. Sh. Sh.
Assets ‘000’ ‘000’ ‘000’ ‘000’
Non current assets
Property, plant & Net profit before
equipment finance costs 6,200
Current cost: Deprn adjustment (80)
6,000 x 240/120= 12,000 Adjstmt on sale of plant (2,160)
16,000 x 275/250 = 17,600 Cost of sales adjstmt (621)
Depreciation: Monetary working
(4,200) x 240/120 = (8,400) capital adj (334) (3,195)
(800) x 275/250 = _____ _(880) 3,005
3,600 16,720 Gearing adjstmt 969
Current assets: Product: finance costs (300)
Inventory _669
7,200 x 366/363 = 7,260 Curr cost profit before tax 3,674
(5,100) x 402/400 5,126 Taxation (2,300)
Trade receivable 6,300 8,000 Retained profit 1,374
Cash at bank _1,200 _____
14,760 13,126 Current cost reserve:
Current Liabilities: Balance as at 30 Sept.1999 3,680
Bank overdraft 900 Adjstments for the year
Trade payables 2,900 4,200 Uplift on old plant
Current tax 2,300 ____ (1,200 – 840) 360
5,200 5,100 New plant 1,600
9,560 8,026 Cost of sales adjustment 621
13,160 24,746 Monetary working capital 334
Financed by Gearing adjustment (969)
Ordinary share capital 2,000 2,000 Decrease in uplift on stock (34)
200,000 ord shares of Sh10 3,680 5,592 Balance as at 30 Sept.2000 5,592
Current cost reserve 6,580 7,954
Curr cost retained earnings 12,260 15,546
Shareholder’s funds
Non-current liabilities 900 3,200
Deferred tax - 6,000
Debentures __900 _9,200
13,160 24,746

Workings
(i) OC Depreciation 17,600 x 10% x 6/12 = 880
IIC Depreciation: 16,000 x 10% x 6/12 = 800
Depreciation adjusted 80
(ii) Disposal of plant
Disposal of plant
Plant: HC 6,000 Depreciation: HC 4,200
HC Profit & Loss A/c 2,100 CB 3,900
8,100 8,100
CC Disposal A/c
CC Dep. 8,400
CC B/f 12,000 CC Res. 840
CC Dis. 1,200 CC: 1400 9,240
CC 1400 13,200 CB 3,900
HCP Profit & Loss 2,100 Ad. 2,100
15,300 15,300
(iii) Cost of sales Adjustment
Closing stock 5,100 x 384/400 = 4,896

Opening Stock (7,200) x 384/363 = (7,617)
Change (2,100) - (2,721) = 621
(iv) Monetary working capital adjustment
Closing 8,000 – 4,200 x 384/400 = 3,648

Opening 6,300 – 2,900 – 3,400 x 384/364.5 = 3,582
Change 400 - 66 334
(v) Gearing Adjustment

Average shareholders’ Fund (12,260 + 15,546)-
13,903
Average Borrowings {(900 | 2,300 – 1,200)
{9,200 | 900} 6,050
Gearing adjustment: 6,050 x 3,195
6,050 + 13,903 - 969
QUESTION FOUR
(a). Scheme of capital reduction
The object of such scheme is to write down the capital of the company so that it realistically
reflects the present values of the assets (on a going concern basis).
The major part of the loss should be borne by the ordinary shareholders, although the
preference shareholders should bear a part of the loss where it is unlikely that they would
receive all their capital in a winding up. A corresponding increase in the rate of preference
dividend is usually given as compensation. The reduced capital of the company will ensure
that it is possible to pay dividends when the company achieves profitability.
Where arrears of cumulative preference dividends have accrued it is usual to compensate

preference shareholders by issuing reduced ordinary shares in part satisfaction of such arreas.
Capital reduction account.
Write offs: Sh. Sh.

Profit & loss a/c 4,580,000 Surplus on freehold 600,000
Plant 240,000
Vehicles 40,000
Goodwill patents 780,000
Investments 20,000
Current assets 120,000 Loss c/d 5,180,000
5,780,000 5,780,000
Losses b/d 5,180,000 Amount written off:
Cost account 96,000 (i).Ordinary shares 4,000,000
Ordinary capital account Share premium transferred 1,200,000
Issued re arrears of pref. 210,000 Purchase commodities 286,000
5,486,000 5,486,000
(b). Outline of suggestions.
1. The preferential creditors be paid in full immediately to prevent them ‘blocking’ the
scheme.
2. The investment be sold to produce part of the funds necessary to continue trading.
3. The banks offer a maximum loan of Sh.1,000,000 subject to a second mortgage charge
being created).
4. The balance of the funds necessary be provided by an issue of shares at par for cash to
the directors and shareholders. The cash required is:
Sh
Preferential creditors 380,000
Purchase of new plant 400,000
Additional stock 300,000
Pay cost of scheme 96,000
Clear existing overdraft 620,000
1,796,000
Produced by:
Sale of investment (ignoring cost) 280,000

Bank loan 1,000,000
Issue of shares to directors/existing 600,000
shareholders 1,880,000
84,000
Leaving a balance at bank of
QUESTION FIVE
(a). The criteria that must be satisfied before an item of property plant and equipment should be
recognized as an asset are:
(1) It is possible that future economic benefits associated with the asset will flow to the
enterprise; and
(2). The cost of the asset to the enterprise can be measured reliably.

(3). An item of property, plant and equipment which qualifies for recognition as an asset should
initially be measured at its historical cost less accumulated depreciation or at revalued
amount at the date of revalue.
The cost of an item comprises of its purchase price (including import duties and non-refundable
purchase taxes) and any directly attributable costs of bringing the asset to working condition for its
intended use, less any trade discounts and rebates.
Examples of directly attributable costs that could be included are:

1. The cost of site preparation:
2. Initial delivery and handling cost
3. Installation costs:
4. Professional fees such as for architects and engineers;
5. The estimated cost of dismantling and removing the asset and restoring the site, to the extent
that it is recognized as a provision under IAS 37: Provisions contingent liabilities and contingent
assets;
6. Borrowing costs, incurred specially for the purpose of acquiring an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale, which are capitalized in
accordance with the allowed alternative treatment in IAS 23: Borrowing Costs.
Examples of costs that should be included as a component of the cost of property, plant and
equipment are:
(1). Administration overhead cost (unless they can directly be attributed to the asset or to bringing
the asset to its working condition):
(2). Other general overhead costs (-11)
(3). Start-up and pre-production cost (-11)
(4). Initial operating losses incurred prior to an asset achieving planned performance.
(b). When a cash generating unit is tested for impairment, an enterprise identifies whether
goodwill that relates to this cash generating unit is recognized in the financial statements. If
goodwill is recognized, the enterprise should perform a “bottom-up test” i.e.
(i). Identify whether the carrying amount of goodwill can be allocated on a reasonable and
consistent basis to the cash generating unit under review; and
(ii). Then compare the recoverable amount of cash-generating unit under review of its
carrying amount, including the carrying amount of allocated goodwill.
An impairment loss should be recognized for a cash-generating unit if, and only if, its
recoverable amount is less than its carrying amount. The impairment loss should be allocated
to reduce the carrying amount of the assets of the unit in the following order;
(a) First, to goodwill allocated to the cash-generating unit (if any) and
(b) Then, to the other assets of the unit on a pro-rata basis based on the carrying amount of
cash asset in the unit.
In allocating an impairment loss in this way, the carrying amount of an asset should not be
reduced below the highest of:
(a) Its net selling price

(b) Its value in use; and (1)
(c) zero
Total Githurai Kahawa Githurai Stores

(2). Githurai and Kahawa Sh. M Sh.m Sh.m Recovery amount
Stores higher at:
Goodwill at cost 8 5 3 (a).Net selling
price Sh.15m value
in use Sh.20m
Store at cost 40 25 15
Total cost 48 30 18
Githurai Store Sh.m Impairment carrying value after

Allcated Goodwill: Cost (as allocated above) 5 loss impairment loss
Accumulated amortization (1.1.2000) (0.5) Sh.million
4.5 Nil
Store Cost 2.5 (4.5)
Accumulated . Depreciation .(1.1.2000) (2.5)
22.5 20
27.0 (2.5) 20 Value in use
7.0
Recognize
as an
Expense in
the Income
statement
Immediately

Kenya Fishers Ltd.

Grant set up as deferred income Grand deduction from asset
1999 2000 1999 2000
Dr. Assets Sh.m Sh.m Sh.m Sh.m
Factory: cost 200 200 Factory net cost 180 180
Depreciation (40) (50) (52) (65)
160 150 128 115
Cr. Deferred income
FAO Grant 128 Nil FAO Grant 48 Nil
P & L Extracts 1999 2000 1999 2000
Sh.m Sh.m Sh.m Sh.m
Income FAO Grant
Factory 5 Depreciation (5) (5)
Electricity 8 Electricity (9) (11)
13 Deduct FAO (8) __
Dep: factory 10 (16)
FAO Grant withdrawn
JUNE 2001
QUESTION ONE
Translation
WORKINGS
Translation
TCL
INCOME STATEMENT
For the year ended 30.9.20X0
Tsh. Million Rate Ksh.million

Sales 16,224 13 1,248
Cost of sales (11,024) 13 (848)
Gross profit 5,200 400
Distribution costs (1,872) 13 (144)
Administration expenses (1,248) 13 (96)
(3,120) (240)
Operating profit (2,080) (160)
Finance costs (120) 12 (10)
Net profit before taxation (1960) (150)
Taxation (585) 13 (45)
Profit after taxation 1,375 105
Dividends: interim (130) 13 (10)
Final proposed (240) 12 (20)
(370) (30)
1005 75
TCL
BALANCE SHEET
AS AT 30.9.20X0
Assets
Property plant & equipment (NBV)4241 12 353
Current assets
Inventories 852 12 71
Trade & other receivables 1,248 12 104
Cash 192 12 16
2,292 191
Current liabilities
Trade & other payables (828) 12 (69)
Current tax liabilities (48) 12 (4)
Proposed dividend (gross) (240) 12 (20)
(1,116) (93)
Net current assets 1,176 98
5,417 451
Share capital: authorised

issued and fully paid 90m

ord. Shares of sh.10 900 15 60

Share premium a/c 300 15 20
Exchange reserve 45
Retained earnings
Pre-acquisition 1,350 15 90
Post-acquisition 1,475 balancing 120
4,025 335
Deferred tax 192 12 16
Long-term loan 1,200 12 100
1,392 116
5,417 451
Exchange differences
Net assets as at 30.9.1999
As at 1.10.99 rate: 3,020/14 216
As at 30.9.00 rate: 3,020/12 (252)
Exchange gain (36)
Profit for the year

As per income statement 75
At 30.9.00 rate: 1,005/12 (83.75)
(8.75)
(44.75) Approx. 45
Revaluation reserve
Tsh. million
Fair value of assets as at 1.1.99 3,000
Net book value of assets as at 1.1.99 2,550
450
Therefore, 450/15 = Ksh. 30 million
Depreciation adjustment
Ksh. million
1999: 30/6 5
20X0: 30/6 5
10
Cost of control a/c
Cost of control a/c

Investment in TCL 220 Ordinary shares 48
Share premium 16
Revaluation reserve 24
P& L a/c 72
- Goodwill 60
220 220
Profit and loss a/c

Depreciation adjustment 10 KL 438
COC: 80% X 90 72 Div. Receivable 16
Minority int. 40 (80% X 20)
20% X (210 – 10) Exchange reserve on
foreign loan 21
TCL 210
CBS 563 ____
685 685
KL limited foreign loan a/c

Tsh Translation Ksh Tsh Transaltion Ksh
M Rate m m Rate m
Bal b/d 1800 (14) 129
Bal c/d 1800 (12) 150 Ex. Loss ____ 21
1800 150 1800 150
Tutorial note: IAS 21 paragraph 19 “Exchange differences arising on a foreign currency liability
accounted for as a hedge of an enterprise should be classified as equity in the enterprise’s financial
statements until the disposal of the net investment at which they should be recognised as income or
as expense in accordance with paragraph 37.
The exchange loss of Kshs 21 million recognised in the profit and loss account should therefore be
transferred to the exchange reserve account.
Minority Interest A/C

Depr Adj O.S.C 60 x 20% 12
10 x 20% 2 S. Premium 20 x 20% 4
Exchange
Reserve 45 x 20% 9
Fair value adjustment
(Revaluation Reserve)
30 x 20% 6
Retained Reserves
Bal c/d 71 210 x 20% 42
73 73

Exchange reserve a/c

Balance b/f 9 TCL 45
From p & l a/c 21
Minority interest 9
(20% 45)
Bal c/d 6 ___
45 45
Property plant & equipment

KL 418 Additional depreciation 10
TCL 353
Revaluation adj. 30 Bal c/d 791
801 801
Kenphone Ltd and its subsidiary

Consolidated income statement
For the year ended 30th September 20X0
Kshs million
Sales (3112 + 1248) 4,360
Cost of sales (1867 + 848) (2,715)
Gross profit 1,645
Distribution costs (423 + 144) (567)
Administrative expenses (369 + 96 + 5) _(470)
(1,037)
Finance costs interest on loans (9 + 10) (19)
Profit before taxation 589
Taxation (126 + 45) (171)
Profit after taxation 418
Minority interest (20% X (105-5) (20)
Profit attributable to members of the group 398
Dividends: interim dividend 60
Final proposed 100
(160)
Retained earnings for the year 238
Retained earnings b/f 315
553
Reconciliation
Kenphone Ltd. Group

Consolidated Balance Sheet
As at 30th September 20X0
Non Current Assets 791
Intangible Asset – goodwill 60
Current Assets:
Inventories (153 + 71) 224
Trade and other Receivables (239 + 104) 343
Cash (78 + 16) 94
1512
Capital & Reserves
Ordinary Share Capital 200
Share Premium 50
Exchange reserve 6
Retained Earnings 563
Minority Interest 71
Non-Current liabilities:
Deferred tax (25 + 16) 41
Long-term loan (150 + 100) 250
Current Liabilities
Trade and other payables (143 + 69) 212
Current tax (11 + 4) 15
Proposed Div – Group 100
Minority (20 x 20%) 4 104
1512
QUESTION TWO
(a) i). Related party – parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the other party making financial and
operating decision.
ii). Related party transaction- A transfer of resources or obligations between related parties,
regardless of whether a price is charged.
b) The standard deals only with the following relationships: -
(a) Enterprises that directly or indirectly through one or more intermediaries, control or are
controlled by, or one under common control with the reporting enterprise. (This includes
holding companies, subsidiaries and fellow subsidiaries).
(b) Associates
(c) Individuals owning, directly or indirectly an interest in the power of the reporting
enterprise that gives them significant influence over the enterprise and close
members of the family of any such individual.
(d) Key management personnel, i.e. those persons having authority and responsibility
for planning, directly and controlling the activities of the reporting enterprise,
including directors and officers of companies and close members of the families of
such individuals.

(e) Enterprises to which a substantial interests in the voting power is owned, directly or
indirectly by any person described in (c) or (d) or over such a person able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprises and enterprises that have a member or key
management in common with the reporting enterprises.
DISCLOSURES REQUIRED UNDER IAS 24
(c) TPL and MHSL are both under the control of Mr. Tamibar the managing director of the
company. TPL makes purchases from MDFL, an associate of TPL.
Transactions with the related parties.
Related Types of Amount Pricing policy Outstanding balance

party transaction
MDFL Purchase of Sh.32 million 11% above normal selling Due to MDFL
goods price Sh.3 million
MHSL Purchase of Sh.49 million 10% above normal selling Due to MHSL Sh.5
goods prize million
TTL is controlled by TPL, its holding company transactions with TPL

Type of transaction Amount Pricing policy Outstanding balance
Sale of services Sh.38 million Firms length price Receivable from TPL Sh.4
million
MDFL is an associate of TPL, TPL and MHSL are both under the control of Mr. Tamiba, a
director
Transaction with related parties
Related party Type of Amount Pricing policy Outstanding
transaction balance
TPL Sale of goods Sh.42 million 11% above normal Receivable from
selling price TPL
Sh.3 million.
MHSL Sale of goods Sh.66 million 10% above normal Receivable from
selling price MHSL
Sh.3 million
MHSL and TPL are both under the control of Mr. Tamiba, a director of MHSL, MDFL is an
associate of TPL
Related Type of Amount Pricing policy Outstanding balance

party transaction
TPL Sale of goods Sh.49 million 10% above normal Receivable from TPL
selling price Sh.3 million.
MDFL Purchase of goods Sh.66 million 10% above normal Due to MDFL.
selling price Sh.6 million
QUESTION THREE
(a) Computation of current tax
Sh. ‘000’ Sh. ‘000’

Reported profit before tax 6,200
Add/less
Depreciation expense 8,500
Amortisation of goodwill 500
Capital allowances (4,500)
General provision on stores 1,500
Decrease in leave passage provisions (700)
Donations 5,000
Deductible prepayment (2000)
Reduction in exchange loss (800)
_____ 7,500
_____
Taxable income 13,700
Current tax at 50%

50% x 13700 = 6,850
FIXED ASSETS A/C

Sh. ‘000’ Sh. ‘000’
January balance c/d 2000 53,500 Balance c/d 47,000
Revaluation 2,000 Depreciation expense 8,500
_______ _______
55,500 55,500
COMPUTATION OF DEFERRED TAX EXPENSE/INCOME

(a) Determination of temporary differences
2000 1999
Carrying amount Sh. ‘000’ Sh. ‘000’
Stocks 13,500 7,500
Accruals (6,000) (4,500)
a) 59,500 60,000
Tax Bases
Fixed Assets 4,0,000 48,500
Stocks 15,000 7,500
Prepayment 3,000 3,500
Accruals (4,200) (2,000)
b) 53,800 57,500

Temporary difference
a–b 5,700 2,500
Timing difference
Foreign exchange
Loss balance 2,800 3,600
Tax rates 50% 40%
Balance sheet items whose carrying amounts are as tax bases are excluded from the workings
1. Fixed assets: 2000 1999

Sh. ‘000’ Sh. ‘000’
Leasehold property 7,500 9,000
Assets without capital allowances 14,500 17,000
Assets with capital allowances (WDU) 18,000 22,500
40,000 48,500
2. Stocks (100/90 x Sh. 13,500) 15,000 7,500
3. Accruals 6,000 4,500

Less provision for leave passage 1,800 2,500
4,200 2,000
4. Prepayments 5,000 3,500

Less deductible amount 2,000 -
3,000 3,500
(b) Calculation of deferred tax Liability (assets) and deferred tax expenses/income.
2000 1999
Sh. ‘000’ Sh. ‘000’
Deferred tax liability /Asset due to
temporary difference (tax rate x difference) 2,850 1,000
Deferred tax liability/asset from origination
reversal of timing differences (1,400) (1440)
Deferred tax liability /asset c/f 1,450 (440
Less opening deferred tax liability/Asset 440 -
1,890 (440)
Add/less
Adjustment to opening deferred tax
liability/asset due to change in tax rate 110
Deferred tax attributable to revaluation of assets (1,000) (3,200)
Deferred tax expense (income) posted to profit and
loss account 1,000 3,640
Current Tax Account

Sh. ‘000’ Sh. ‘000’
December 31 balance c/d 2,500 1999
P&L account 2,500
2000
September 15 Bank 2,500 January Balance 2,500
December 31 balance c/d 6,850 December P/L account 6,850
9,350 9,350
Deferred Tax Account

Sh. ‘000’ Sh. ‘000’
Retained profits account 3,640 1999
Revaluation account 3,200
_____ Balance c/d 440
3,640 3,640
2000 2000
January balance b/d P&L a/c 440 Profit and loss account 890
Adjustment 110 Revaluation account 1,000
December 31 Balance c/d 1,340 ____
1,890 1,890
Revaluation Account
Sh. ‘000’ Sh. ‘000’
Deferred fixed account 3,200 1999 8,000
Fixed Assets
Balance carried down 4,800 ______
8,000 8,000
2000
Deferred fixed account 1,000 Balance brought down 4,800
Balance carried down 5,800 Fixed Assets 2,000
6,800 6,800
QUESTION FOUR
(a) (i) Functional Currency is the currency of the primary economic environment in which
the entity operates.
The primary economic environment in which the entity operates is normally the one in
which it primately generates and expends cash.
An entity considers the following factors in determining it’s functional currency:
• The currency that mainly influences sales prices for goods and services.
• The currency that mainly influences labour, material and other costs of providing
goods or services.
• The currency in which funds from financing activities are generated.
• The currency in which receipts from operating activities are usually retained.
Where the above indicatiors are mixed and the functional currency is not obvious,
management uses its judgement to determine the functional currency that most faithfully
represents the economic effects of the underlying transactions, events and conditions.

(ii) Translation of a foreign currency business transaction

A foreign currency transaction is a transaction that is denominated or requires settlement in a
foreign currency, including transactions arising when an entity:
(a) Buys or sells goods or services whose price is denominated in a foreign currency
(b) Borrows or lends funds when the amounts payable or receivable are denominated in a
foreign currency; or
(c) Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a
foreign currency.
Measurement
Initial Recognition – apply the spot exchange rate at the date of transaction to the foreign
currency amount.
Subsequent Recognition – at each subsequent balance sheet date:
(i) Monetary items (e.g. loans) shall be translated using closing rate.
(ii) Non-monetary items at historical cost shall be translated using exchange rate at date of the
transaction.
(iii) Non-monetary items at fair value shall be translated using the exchange rates at the date the
fair values were determined.
(b) Translation of an investment in foreign operation

When a group contains individual entities with different functional currencies, the results and
financial position of each entity are expressed in a common currency, presentation currency, so
that consolidated financial statements may be presented.
Translation
Following procedure is used to translate the results and financial position of an entity whose
functional currency is not the presentation currency:
a) Assets and liabilities for each balance sheet presented shall be translated at the closing
rate at the date of that balance sheet;
b) Income and expenses for each income statement shall be translated at exchange rates at
the date of the transaction or average rate for the period if more practicable.
c) Equity items such as share capital, share premium and revalutation reserves shall be
translated using the rate ruling at date of acquisition of a foreign entity;
d) All resulting exchange difference shall be recognized as a separate component of equity
e.g. translation reserve A/C.
(b) Lootex Ltd. Value added statement for the year ended 30 September 2000
Sh. ‘000’ Sh. ‘000’
Turnover (gross) 32,135
Cost of bought in materials and services 16,255
Value added to the company 15,880
Value added available to the company 16,190
Applied as: -
To employees
Wages, salaries and pension 5,000
To providers of capital
Interest expenses 350
Ordinary dividends 340
Minority interest profits 200 890
To the government
Corporation tax 770
VAT 8,000 8,770
Retained for expansion and maintenance
Depreciation 675
Retained profit 855 1,530
16,190
Workings
P and L Account
Sh. ‘000’ Sh. ‘000’
Turnover (32135 – 8000) VAT 24,135
Cost of sales
Closing stock of raw materials (3,400) 16,255
Gross profit 7,880
8,190
Expenses:
Depreciation 675
Wages and salaries 5,000
Interest expense 350 6,025

Minority interest (200)
Ordinary dividends (340)
Retained profit 855
QUESTION FIVE
(a) Goodwill is the term used by accountant to describe the difference between the value placed
upon a firm and the sum of the values of the identifiable net assets of that firm. Goodwill is
said to exist only when an enterprise is earning profits over and above the normal earnings of
other similar enterprises in the same industry. Goodwill has therefore been defined as “the
present value of a firm’s anticipated excess earnings”. Goodwill is an intangible asset arising
from an enterprises in the same trade with the same assets.
Goodwill is dependent on a wide variety of factors, which include:
(i) The location of the business premises

(ii) The nature the firms products

(iii) Reputation of the firms’ services
(iv) Staff personality
(v) Possession of valuable contracts and or complete or part monopoly.
(vi) Reputation of management
(vii) Possession of trademarks, patent or well known business name and
(viii) Continuous advertising campaign.
Characteristics of Goodwill
(i) It cannot be realized separately from a business as a whole.
(ii) The value of goodwill may fluctuate largely according to internal as well as external
factors over a short period of time.
(iii) Intangible factors that are responsible for goodwill cannot be valued.
(iv) The value of goodwill has no reliable or predictable relationship to any costs which may have
been incurred.
(v) The assessment of the value of goodwill is highly subjective.
Categories of goodwill
(i) Acquired goodwill – this represents a payment made by the acquirer in anticipation of future
economic benefits from assets that are not capable of being individually identified and
separately recognized.
Positive acquired goodwill – the excess of the cost of the business combination over the
acquirers assets, liabilities and contigent liabilities.
Accounting treatement
Under IFRS 3, the positive acquired goodwill should be recognised as an asset and should not
be amortised. Instead, the acquirer shall test it for impairment annually or more frequently if
events or changes in circumstances indicate that it might be impaired, in accordance with IAS
36, Impairment of Assets.
Negative acquired goodwill – the excess of acquirers interest in the net fair value of
acquirees indentifiable assets, liabilities and contigent liabilities over cost.
Accounting treatment
Under IFRS 3, the negative acquired goodwill should be recognised immediately in profit &
loss A/C.
(ii) Non acquired goodwill

• It is inherently acquired and not a subject of acquisition.
• It arises out of a subjective valuation but not through a market transaction.
• Under IAS 38, Intangible Assets. Non acquired goodwill also known as internally
generated goodwill shall not be recognised as an asset.
(iii) Non-purchased goodwill

- It is inherently generated and not a subject of acquisition.
- It arises also out of a subjective valuation but not through a market transaction.
- It should not be recognized in the financial statements
(b) (1) Purchase of local trader

Sh. Sh.
Purchase consideration 1,310,000
Less: net assets at balance sheet values 982,000
Revaluation of lease 190,000
Fittings 25% x 240,000 (60,000)
(1,112,000)
Goodwill arising on acquisition 198,000
(2) Planet Ltd.

Purchase consideration 560,000
Net assets 1.10.99 320,000
Profit to 31/05/2000
8/12 x 360,000 240,000 560,000
Goodwill arising on acquisition -
(3) Purchase of incorporated business

Purchase consideration 700,000
Net assets (840,000)
Negative goodwill arising on combination (140,000)
(ii) Reserves note
Retained profits Share premium Non-distributable

reserves
Sh. Sh. Sh.
At 1- 10 – 99 8,620,000 6,000,000 -
Retained for the year 1,360,000
Arising in the year 140,000
Goodwill acquired in the year (58,000) ______ (140,000)
At 30 – 09 – 2000 9,922,000 6,000,000 -
Note – Goodwill on the acquisition of planet Ltd. does not arise in the individual company’s
Accounts.

DECEMBER 2001
QUESTION ONE
(a)
Umma Ltd and it’s subsidiary
Consolidated income statement for year to 31.12.2000
Shm Shm
Turnover 2,230.00
Cost of sales (1,428.00)
Gross profit 802.00
Administration and distribution costs 438.50
Finance costs 42.00 (480.50)
Profit before tax 321.50
Income tax expense (109.00)
Profit after tax 212.50
Attributable to Holding company 206.80

Attributable to minority interest __5.70
212.50
(b)
Umma Ltd and it’s Subsidiary
Consolidated Balance sheet as at 31 December 2001
Non current assets Shm
Property, plant and equipment 1,339.50
Goodwill ___12.00
1,351.50
Net current assets _872.00
2,223.50
Share capital 330.00
Share premium 350.00
Foreign currency exchange reserve (17.40)
Retained profits _938.40
1,601.00
Minority interest __58.50
Shareholder’s funds 1,659.50
Net current liabilities _564.00
2,223.50
Translated balance sheet of Subsidiary

TRm rate Kshm
PPE 1,890.00 1/5 378.00
Net current assets 645.00 1/5 129.00
Net current liabilities (1,115.00) 1/5 223.00
1,420.00 730.00
Share capital 240.00 1/4 60.00

Share premium 80.00 1/4 20.00
Retained profits; Pre 610.00 1/4 152.50
Post _490.00 Bal fig _51.50
1,420.00 284.00
Translated income statement

TRm Rate Kshm
Turnover 3,060.00 1/5.1 600.00
Cost of sales (2,550.00) 1/5.1 (500.00)
Gross profit 510.00 100.00
Admin. & Dist exp (51.00) 1/5.1 (10.00)
Finance cost (102.00) 1/5.1 (20.00)
Profit before tax 357.00 70.00
Income tax (153.00) 1/5.1 (30.00)
Profit after tax 204.00 40.00
Dividends paid (52.00) 1/5.2 (10.00)
Retained profit for year 152.00 30.00
Cost of control
Shm Shm
Investment in ugeni 220.00 OSC (80% x 60) 48.00
Share prem (80% x 20) 16.00
P& L (80% x 152.5) 122.00
Fair value adj (80% x 27.5) 22.00
_____ Goodwill _12.00
220.00 220.00
Group P & L
Shm Shm
Coc P & L at acq 122.00 Umma 895.00
MI (204 + 21.7) x 20% 45.10 Ugeni (152.5 + 51.5) 204.00
Net current assets 4.00 Foreign exchange reserve 21.70
Group PPE (depn) 8.80
Net current liabilities (E Loss) 2.40
Balance c/d 938.40 ______

1,120.70 1,120.70
Minority Interest (b/s)

Shm Shm
Net current assets (UP) 1.00 OSC (20% x20) 12.00
Grp PPE dpn 2.20 Share premium 4.00
Exchange loss 0.60 P & L 45.10
Foreign exchange reserve 4.30 Fair value adjustment 5.50
Bal c/d 58.50 ____
66.60 66.60
Group PPE
Shm Shm
Umma 945.00 Depn on FV
Ugeni 378.00 P&L 8.80
Fair value adj. CoC 22.00 MI 2.20
MI 5.50
______ Bal c/d 1,339.50
1,350.50 1,350.50

Group Net current assets

shm shm
Umma 725.00 UPCS
Ugeni 129.00 P&L 4.00
Investment in ugeni-loan 23.00 MI 1.00
_____ Bal c/d 872.00
877.00 877.00
Group Non current liabilities

shm shm
Investment in ugeni-loan 37.00 Umma 375.00
Ugeni 223.00
Exchange loss (bal fig)
P&L 2.40
MI 0.60
Balance c/d 564.00 ______
601.00 601.00
Fair value adjustment In local currency using rate on date of

TRm acquisition 1,110 x ¼ = 27.5
Fair value of net assets 1,040.00 Double entry Dr Group PPE 27.5
Value of net assets (930.00) Cr CoC (80% x 27.5) 22
Fair value ajustment 110.00 Cr MI (20% x 27.5)
Depreciation on fair value adjustment = 27.5/5 x 2 = 11
Entry will be: Dr Group P & L (80% x 11) 8.8

Dr MI (20% x 11) 2.2
Cr Group PPE 11
In the books of subsidiary the loan is recorded as follows:
Loan a/c
TRm Kshm TRm Kshm
31.12 C/B 65.00 13.00 31.5 C/B 265.00 50.00
31.12 Bal 200.00 40.00 31.12 P & L Exch loss _3.00
265.00 53.00 265.00 53.00
In the group accounts the subsidiary co. has reported a loss on foreign currency exchange transaction
which should be charged to the profit and loss. In the balance sheet the entries will be:
Dr Group P & L (80% x 3) 2.4
Dr MI (20% x 3) 0.6
Cr Group non current liabilities 3
Group turnover Shm Minority interest (P & L) Shm

Umma 1,650.00 PAT in Ugeni 40.00
Ugeni _600.00 Add UPOI 2.00
2,250.00 42.00
Less intercompany sales __(20.00) Less UPCI (5.00)
2,230.00 Exchange loss (3.00)
Cost of sales Depreciation on Fair value (5.50)
Adjusted profit after tax 28.50
Umma 945.00 MI’s Share (20% x 28.5) 5.70
ugeni _500.00
1,445.00 Foreign Exchange Reserve
Less intercompany sales (20.00)
UPOI (2.00) Closing net assets of Ug 284.00
Add UPCI __5.00 Opening net assets (31.12.99) (275.70)
1,428.00 8.30
Less retained profits (30.00)
Administration and Exchange loss (21.70)
distribution
Umma 420.00 Opening net assets (1420 -152) = Tr 1268

Ugeni _10.00 In Local Currency 1268 x ¼.6 = 275.7
430.00
Exchange loss 3.00
Depn on fair value __5.50
adjustments
438.50
Group retained profits b/f

Shm Shm
Umma 723.00
Add share of post acquisition profits in UG 43.20

Less UPOS (2.00)
Less Depreciation on Fair value adj. (5.50)
35.70
Holding co.s share (80% x 35.7) _28.60
751.60
Explanatory Notes
(i) Where the weighted average rate is used to translate the results of foreign subsidiaries then
the rate ruling on the date of the transaction is used to eliminate inter company profit in
stock. In this case Sh. 20m 9104 TR divided by 5.2) has to be eliminated from turnover and
purchases and additionally Sh. 2m has to be eliminated from opening stock and Sh.5m from
closing stock giving a net adjustment of Sh. 3m. The amount of profit to be eliminated is
the amount of profit in the holding company’s financial statements.
(ii) The loan from Umma to Ugeni is not a permanent loan as it is intended that it will be repaid.
Evidence of this is the fact that an amount of TR 65 million has been repaid at the year end.
As a result the loan should be restated at the closing rate and the resulting exchange
differences taken to the profit and loss account.
(iii) Part c of the question is not relevant.

QUESTION TWO
Baraka Group
Consolidated Cash flow Statement for the year to 31 May 2001
Cash flow from operating activities: Sh. ‘million’ Sh. ‘million
Net profit before tax 728

Adjustments for:
Preference share appropriation 6
Goodwill amortization (WK1) 10
Depreciation 39
Interest income (net) (3)
Profit on disposal of tangible non current assets (15)
Profit from associated company (98)
Operating profit before working capital charges 667
Increase trade receivable (660 -530 – 25 – 17 + 15) 103

Increase in inventories (750 – 588 – 30) (132)
Increase in trade payables (1, 193-913-20-9) 251
Cash generated from operations 603
Interest paid (37 – 6 – 9) (22)

Income taxes paid (200 + 198 + 30 – 203) (225) (247)
Net cash from operating activities
Cash flows from investing activities

Acquisition of subsidiary (net cash received = 17 -35) 18
Interest received (15 + 34 – 170 32
Dividend from associated company (WK2) 3
Purchase of tangible non-current assets (278 – 60 – 100) (118)
Sale of tangible non-current assets (30 + 15) 45
Purchase of trade investments (480 + 205.5) (635)
Net cash used in investing activities (655)
Cash flows from financing activities

Proceeds of issuance of share capital (directors options) 20
Proceeds from long term borrowing (1,262 – 930-100+10) 242
Dividends paid to minority interests (150+97-250+20) (17)
Net cash from financing activities 124

Net decrease in cash and cash equivalents (95)
Cash and cash equivalents at beginning of period 140
Cash and cash equivalents at end of period. 45
Workings:
Sh ‘million’ Sh ‘million’
1. Purchase of subsidiary:
Net assets acquired 100

Group share of net assets (80%) 80
Purchase consideration (shares + cash) 97
Goodwill 17
Goodwill account: Opening balance 83

Goodwill on Neema 17
100
Amortization (10 years) (10)
Closing balance 90
2. Associated company:
Balance as at 1 June 2000 220

Income for the period (98 15) net of tax 83
Dividends received –Cash flow (3)
Balance as at 31 May 2001 300
3. Investments and non-current liabilities: Sh Sh Cash

‘million’ ‘million’ flow
(a) Trade investments – balance 31 May 2000 50

Foreign equity investment 605 605
Exchange difference (205) 400
Purchase in year – other 30 30
Trade investments balance 480 635
31 May 2001
(b) Non-current liabilities – Interest bearing

borrowing:
Balance – 31 may 2001 930

Loan taken out to finance equity 310 310
Investment
Exchange difference (10)
300
Bill of exchange 100
Cash paid (68) (68)
Balance at 31 may 2001 1,262 242
(4) Note as the purchase of tangible non-current assets is being financed by the supplier in part,
and the bill of exchange of Sh.100 million has not been paid, then the purchase of tangible
non-current assets in terms of its cash effect is reduced.
QUESTION THREE
(a) Calculation of CPP reserves as at 31 March 2000:
HCA Conversion Ratio CPP

Sh. ‘000’ Sh. ‘000’
Fixed Assets 58,000 125/120 60,417

Stocks 30,000 125/123 30,488
88,000 90,905

Ordinary share capital 60,000 125/100 75,000

Reserves 18,000 Balance 5,905
78,000 80,905
Net monetary
Liabilities 10,000 10,000
88,000 88,905
Determination of net monetary liabilities as at 31.3.2000:

Sh. ‘000’
Debtors 34,000
Prepayments 1,000
Bank 8,000
Preference shares (20,000)
Loan (20,000)
Trade creditors (12,500)
Accruals (500)
Net monetary liabilities (10,000)
(b) Calculation of Gain or Loss on Holding Monetary Items:

HCA Conversion CPP
Ratio
Sh. ‘000’ Sh. ‘000’
Opening net:
Monetary liabilities (10,000) 149/125 (11,920)
Sales 30,000 149/144 31,042
Sales 60,000 149/137 65,255
Purchases (20,000) 149/144 (20,694)
Purchases (45,000) 149/137 (48,942)
Loan interest (250) 149/136 (274)
Loan interest (250) 149/148 (252)
Salaries (3,500) 149/137 (3,807)
Other expenses (1,000) 149/137 (1,088)
Tax (4,000) 149/137 (4,350)
Tax (4,000) 149/149 (4,000)
Interim dividends (3,500) 149/137 (3,807)
Proposes dividends (3,500) 149/149 (3,500)
Fixed assets (17,000) 149/138 (18,355)
Ordinary shares (10,000) 149/130 11,462
Net Monetary Liabilities (12,000) 13,230
Gain /(loss) = Sh.(12,000) – (13,230)

= Sh.12,000 + 13,230
Gain = Sh.1,230,000
(c) (i) Trading Profit and Loss Account

Sh. ‘000’ Sh. ‘000’
Sales 90,000 96,297
Opening stock 30,000 149/123 36,341

Purchases 65,000 69,636
95,000 105,977
Closing stock 35,000 149/147 35,476
60,000 70,501

Sh. ‘000’ Sh. ‘000’
Loan interest 500 526
Salaries 3,500 3,807
Other expenses 1,000 1,088
Grain on holding
Monetary items - (1,230)
10,000 10,238
Profits before tax 20,000 15,558
Tax 8,000 8,350
Profit after tax 12,000 7,208
Interim dividends 3,500 3,807
Final prop. dividends 3,500 3,500
7,000 7,307
Retained profit 5,000 (99)
Retained profit b/f
HCA 18,000
CPP Sh.5,905 - 149/125 7,039
23,000 6,940
Depreciation expense:
- Old fixed asset 4,000 149/120 4,967

- Net fixed assets 1,000 149/138 1,080
5,000 6,047

Sh. ‘000’ Sh. ‘000’
Current assets
Stock 35,000 35,476
Debtors 40,000 40,000
Bank 5,000 5,000
152,000 166,801

Sh. ‘000’ Sh. ‘000’

Preference share capital 20,000 20,000
113,000 127,801
Loan 18,000 18,000
Accruals 300 300

Proposed dividends 3,500 3,500

152,000 166,801
Translation of :
(a) Fixed assets
Old 54,000 149/120 67,050
New 16,000 149/138 17,275
70,000 84,325
(b) Ordinary shares

Old 60,000 149/100 89,400
New 10,000 149/130 11,462
70,000 100,862
Note: Due to rounding made there was a difference of adjusted to retained profit
QUESTION FOUR
(a) (i) The value added is the difference between the sales of an organization and the raw
materials and services purchased from outside the organisation. It represents the value
which has been contributed by employees, shareholders, the government and all those
who have participated in the production effort of an organisation.
(ii) The advantages of the value added statement are:

The emphasis is on all ‘term’ members –employees, the government, shareholders
and lenders of funds: through increased value and productivity they can increase
the amount of wealth applied to them.
To encourage the workforce to regard, themselves as part of wealth
creating/wealth sharing.
To demonstrate to the workforce the relative proportion of added value
attributable to them in their different capacities and the amount retained in the
business for future expansion and the liability to the government in form of taxes.
The employee participate in added value, but not in profit.
Disadvantages:
The wider sense should include suppliers but they are not considered in the value added
statements as contributors of wealth.
Value Added, as generally disclosed, will be increased if fixed assets are bought rather than
rented and employees engaged rather than subcontracted.
The meaning of value in accounting is not the same as the economists added value, or that
used for value added in taxation.
(b) Manga Limited
Value Added Statement for the year ended 31 March 2001
Sh. ‘000’ Sh. ‘000’ % %

Sales 30,324,000
Cost of goods sold and
General expenses 20,070,000
Value Added: 10,254,000 100
Applied as follows:
To pay employees
Salaries and wages 3,480,000 34
To providers of capital
Interest 800,000 7.8
Dividend 1,800,000 17.6
2,600,000 25.4
Payable to Government
Corporation tax 1,420,200 13.9
Retained in the business
For maintenance of assets
and expansion.
Depreciation 1,240,000 12.0
Retained profit 1,573,800 14.7
2,753,800 26.7
10,254,000 100%
QUESTION FIVE
(a) IAS 12 (income taxes) provisions on:
Fair value adjustment:

The issues is whether fair value adjustment in the purchase method of accounting give rise
to deferred tax where the full provision method is used, some feel that deferred tax should
not be provided on fair value adjustments because these adjustments are made as a
consolidation entry only. Rarely are they taxable or tax deductible and therefore do not
affect the tax burden of the company.
It is argued that providing for deferred tax on fair value adjustments is not an allocation of
an expense but can be used as a smoothing device. Finally, the difference between the
carrying amount of net assets acquired and their fair value is goodwill and therefore no
deferred tax is required.
The arguments in favour of deferred tax are conceptual by nature. If the net assets of the
acquirer are shown in the group accounts, then this will affect the post acquisition earnings
of the group and tax should be excluded. Additionally, since an acquisition gives rise to no
tax effect, the effective tax rate in the profit and loss account should not be distorted as a
result of the acquisition. Thus deferred tax should as an adjustment to reflect the reduction
in the value of the asset
Revaluation of Fixed Assets:

Can be seen as creating a further temporary difference because it reflects an adjustment
of depreciation which is itself a temporary difference. Alternative view is that is a
permanent difference as it has no equivalent within the tax computation. The revaluation
is not a reversal of previous depreciation, simply that the remaining life of the asset will
measure at a different amount. Deferred tax is a valuation adjustment and whilst a
revaluation does not directly give rise to a tax liability, the tax status of the asset is
inferior to an equivalent asset at historical cost and therefore provision or deferred tax
should be made in order to reflect the true after tax cost of the asset.

The revalued asset would not attract the same tax allowances as an asset purchased for
the same amount and therefore if deferred tax was not provided it would distort the post
revaluation effective tax rate.
(b) (i) Baabab Limited
Corporation tax payable 31 March 2001
Sh. ‘000’
Profit per accounts 10,000
Add Depreciation 1,000
11,000
Less WDA -25% x 6M (both assets) 1,500
9,500
Tax payable @ 30% 2,850
(ii) Provision for deferred tax on full provision basis:
Sh. ‘000’
Tax WDV (6m – 25% x 6m) 4,500
Accounts NBV (6m – 10% Dep.) 5,000
(500)
Deferred tax @ 30% 150
Balance Sheet (Extract)

Provision for liabilities and charges:
Deferred tax 150
Profit and loss account (extract)
Profit before taxation 10,000
Taxation – corporation tax @ 30% on profits 2,850
Deferred tax 150
3,000
(b) Partial provision Basis
Maximum cumulative reversal of originating timing differences in respect of accelerated capital
allowances.
Year Capital Depreciation Difference Cumulative

(OTD) originating Timing
Difference/(RTD) Reversing
Allowance timing Difference)
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
2002 1,700 1,600 1,000 100
2003 2,300 1,900 4,000 500
2004 2,100 1,900 2,000 700
2005 1,500 2,100 (6,000) 100
2006 2,400 2,900 (5,000) (400)
2007 2,500 2,000 5,000 100
Profit and Loss Account
Deferred tax charge (on reversing amount) = 30% x 400 = Sh.120,000

Amount not provided for year = Sh.(150,000 - 120,000) = 30,000
Balance sheet provision = Sh.120,000

Amount not provided for year (150 – 120) = 30,000
Tutorial Note:
However under IAS 12 Partial Provision Method is no longer allowed.

MAY 2002
QUESTION ONE
Structure
M Ltd
30%
75%
A Ltd H Ltd
80%
C Ltd
Holdings in C Ltd
Group
75% x 80% = 60%
Minority
Direct 20%
Indirect
25% x 80% 20%
100%
Cost of control
Investment in H Ltd 165,000 Ordinary share capital 75,000
75% x 100,000
Pre-acquisition dividend
Ordinary 75% x 5,000 3,750
Preference 75% x 5,600 4,200
Profit & Loss A/C
75% x 28,000 21,000
General reserve
75% x 40,000 30,000
______ Goodwill 31,050
165,000 165,000
Minority interest
20% x 10,200 20,400
Ordinary share capital
60% x 80,000 48,000
General reserve 24,000
Profit & Loss A/C
______ 60% x 16,000 9,600
102,000 102,000
Consolidated Profit & Loss Account

Shs Shs
UPS 20% x 6,000 1,200 M ltd 98,500
COC – H Ltd 2,100 Dividend receivable
UPS (PPE) 4,000 Ordinary
Minority Interest – H Ltd H Ltd 75% x 10,000 7,500
(25% x 40,400) 10,100 Preference 4,200
COC – C LTD 9,600 Debenture interest 300
Minority Interest- C Ltd Depreciation adjustment 600
40% x 100,000 40,000 H Ltd 44,400
C Ltd 100,000
Pre-acquisition dividend 7,950 Investment in A Ltd
C.B.S 164,350 (30% x 30,000 – 21,000) 2,700
258,200 258,200
Minority Interest
H Ltd Ordinary share 25,000
Profit & Loss A/C 10,100
Dividends –Ordinary 2,500
Preference 1,400
(25% x 800) 200
Investment in C Ltd 20,400 C Ltd
Share capital 32,000
C.B.S 136,800 Profit & Loss A/C _40,000
157,200 157,200
Current assets
M Ltd 145,500 UPS 1,200
H Ltd 143,400 C.B.S 407,700
C Ltd 120,000 ______
408,900 408,900
Property, Plant and equipment

M Ltd 250,000 UPS (20% x 20,000) 4,000
H Ltd 220,000 C.B.S 666,000
C Ltd 200,000 ______
670,000 670,000
Provision for depreciation

M Ltd 60,000
Overcharge (20% x 4000) 800 H Ltd 130,000
C.B.S 229,200 C Ltd 40,000
230,000 230,000

Premium on acquisition
Cost of investment 26,100
Net Assets acquired
Profit & Loss A/C 21,000
30% x 87,000 26,100
NIL
Investment in Associate
Cost of Acquisition 26,100
Post-acquisition reserve 2,700
28,800
M Limited and its Subsidiaries

Consolidated Balance sheet
As at 31 December 2001
Sh. Million Sh. Million
ASSETS
Non – Current Assets
Property and equipment 666,000
Provision for depreciation (229,200) 436,800
Goodwill 31,050
Investment in Associate 28,800

Current Assets 407,700
EQUITY&LIABILITIES
Capital&Reserves
Ordinary share of Sh.10 each 300,000
508,140
Minority interest 136,800
Non Current Liabilities
6% debentures (20,000 – 5,000) _15,000
659,940
Current Liabilities
Trade payables 207,300
Accrued debenture interest 900
Proposed dividends _30,000
TOTAL EQUITY & LIABILITIES 904,350
QUESTION TWO
(a) (i) Experience adjustments
These are adjustments to retirement benefit costs arising from the differences
between the previous actuarial assumption as to future events and what actually
occurred.
(ii) Accrued benefit valuation method (projected unit credit method)
They are actuarial valuation methods that reflect retirement benefits based on
service rendered by employees to the date of valuation. The see each period of
service as giving rise to an additional unit of benefit entitlement and measures each
unit separately to build up the final obligation. Such valuation methods may
incorporate assumptions regarding projected salary levels to the date of retirement.
(iii) Current Service Cost
In defined contribution schemes this refers to the contributions made for services
rendered in the current year.
In defined schemes, this is the increase in the present value of a defined benefit
obligation resulting from the employees’ service in the current period.
(iv) Vested employee benefit
These are benefits that are contributional on future employment
(b)
Year Finding P&L Balance sheet
Sh. ‘M’ Sh. ‘M’ Sh. ‘M’
2002 10 + 30 = 40 19 21 Prepayment
2003 10 + 30 = 40 19 42 ″
2004 10 + 30 = 40 19 63 ″
2005 10 19 54 ″
2006 10 19 45 ″
2007 10 19 36 ″
2008 10 19 27 ″
2009 10 19 18 ″
2010 10 19 9 ″
2011 _10 _19 0 ″
190 190
Workings
Change to P& L
Standard contribution 10m

Amortization / under finding = 90/10 9
19m

Change to P& L
(c) Workings
Standard contribution 50m
Less: Write off of over finding 260/10 26m
24
Year Finding P& L Balance sheet

Sh.’M’ Sh. ‘M’ Sh.’M’
2002 - 24 24 Accrual
2003 - 24 48 ”
2004 30 24 42 ”
2005 30 24 36 ”
2006 30 24 30 ”
2007 30 24 24 ”
2008 30 24 18 ”
2009 30 24 12 ”
2010 30 24 6 ”
2011 30 24 0 ”
240 240
QUESTION THREE
(1) (By industry) Gawanya Ltd
Segmental Report for the Period ended 31/12/2001
Classes of Stationery Tissue Packaging Others Elimination Consolidated
Business
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000 Sh.’000’ Sh.’000’
’
Revenue
External sales 11,759 18,390 5,200 3,290
Inter-segment sales
Total revenue 1,227 3,658 - - (4,885)
Results 12,986 22,048 5,200 3,290 (4,885) 38,639
Segment results
Unallocated 2,442 5,916 821 (201) 8,978
expenses
Operating Profit (5,004)
Asset
Segment Assets 3,974
Unallocated assets 31,750 44,620 17,775 94,145
14,856
109,001
(2) Geographically
Gawanya Ltd
Segmental report for the period ended 31.12.2001
Geographical Market Kenya Uganda Others Elimination Group
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’

Revenue
External revenue 28,200 7,227 1,481
Inter-segment 2,430 2,117 ____ (4,547)
30,630 9,344 1,481 (4,547) 36,908
Unallocated sales 3,290
40,198
Results
Segment results 4,873 3,127 487 8,047
Unallocated expenses (4,073)
3,974
Assets
Segment Assets 41,820 30,600 21,660 94,080
Unallocated assets 14,921
109,001
(b) (i) The proportion of unallocated expenses relative to the total operating profit is
very high thus more information is required in tern since the value of segmental
information is very much reduced since the unallocated expenses comprises large
proportion of operating profit.
(ii) A short description of the activities under each segment would be necessary for
users in understanding the nature of each segment.
(ii) More information will be required on geographical segment since it is not clear
whether the geographical segment reflect the source of the activity or the ultimate
location.
(c) (i) In defining and disaggregating segments for purpose of determining reportable
segments subjectivity is inevitable.
This reduces comparability of segmental information across companies
(ii) It might be time consuming and costly to enterprises 18if the information is not
available internally.
(iii) Segmental information would not only be available to investors but also
competitors.
(iv) Defining of segments and keeping them separate for reporting purposes may be
difficult
(v) Identifying a reasonable and consistent basis of allocating common items among
segment may be difficult.
QUESTION FOUR
(a) Off balance sheet financing arises when funds borrowed to finance operations or capital
projects do not appear on the enterprises balance sheet. This has the effect of minimizing
the amount of debt disclosed in the enterprises balance sheet making the enterprise to
appear more financially secure than it really is because the debt to equity ration is
understated. Additionally since inflation understates assets, an enterprise may look for ways
of understating its liabilities. This understatement enables enterprises to obtain additional
debt.

(b) (i) Pivot Ltd

Cash flow statement direct method
For the period ended 31st December 2002
Sh.’000’
Cash flow from operating activities
Cash received from customers 9,250
Cash paid to suppliers and employees (6,270)
Cash generated from operations 2,980
Tax paid (100)
Net cash from operating activities 2,880
Cash flow from investing activities
Proceeds from sale of buildings 970
Cash flow from financing activities
Proceeds from issue of shares 1,200
Dividends paid (150)
Cash paid on finance lease (700)
Increase in cash and cash equivalent 4,200
Cash and cash equivalent, beginning 500
Cash and cash equivalent, ending 4,700
Reconciliation of the profit for the year with cash from operations
(a) Profit from operations
1. Accounts receivable
Balance 300 C.B 5,750
Sales 5,900 Balance 450
6,200 6,200
Credit sales 5,900

Cash sales 3,500
9,400
2. Cost of sales
C.B 4,320 Balance 500
Balance 475 Purchases 4,295
4,795 4,795
Cost of sales
Inventory 1.1.02 1,500
Purchases 4,295
Goods available for sale 5,795
Inventory 31.12.02 1,700
4,095
3. Profit from operations

Sh.’000’
Sales 9,400
Gross profit 5,305
Other operating income 470
5,775
Expenses
Depreciation *2,150)
Wages (1350 – 75 + 95) (1,370)
Other expenses (150 + 600 – 200) (550)
1,705
4. Reconciliation
Sh.’000’
Profit from operations 1,705

Adjusted for:
Depreciation 2,100
Gain on sale of building (470) 1,680
Operating profit before working capital charges 3,385
Increase in accounts receivable (150)
Increase in inventories (200)
Increase in prepaid insurance (50)
Increase in accrued wages 20
Increase in accounts payable (25)
Tax paid (100)
Net cash flow from operating activities 2,880
QUESTION FIVE
IAS 36 has classified these conditions into:
(1) External Indicators
(2) Internal Indicatiors
(a) An asset is impaired when its Carrying Amount exceeds its recoverable amount.
An entity should assess at each reporting date whether there is any indication that an asset
may be impaired.
In assessing whether there is any indication that an asset may be impaired, an entity shall
consider, as a minimum, the following indications:
External Sources of Information

(a) There has been a significant decrease in the market value of the asset in excess of
the normal process of depreciation.
(b) There are significant changes with an adverse effect on the entity in the
technological, market, economic or legal environment in which the entity operates.
(c) There is an increase in market interest rates or other market rates of return on
investment likely to affect the discount rate used in calculating an assets value in use
and decrease the assets recoverable amount.

(d) The carrying amount of the net assets of the entity is more than its market
capitalization.
Internal Sources of Information

(a) Evidence is available of obsolescence or physical damage of an asset.
(b) Evidence is available that indicates that the economic performance of the asset will
be worse than expected.
(c) There has been a significant adverse change in the manner in which the asset has
been used.
Advantages of replacement cost accounting (RCA)

(i) RCA measurements can be subjective. Indices are often used in measurement of
assets and these values may be unreliable.
(ii) RCA does not take account of changes in the general price level and gains or losses
on holding, monetary assets and liabilities.
(iii) This system is based on the assumption that the firm is a going concern and that
reliable entry price data is available and can be readily obtained. This may be a
problem during a period of technological change as the replacement cost may relate
to a new generation of asset rather than existing asset.
(iv) There is a problem in correctly specifying what “replacement cost” price actually
means. It could mean the used value or the reproduction cost or the cost of an
equivalent asset.
Disadvantages of Net realizable Value (NRV) method

(i) NRV is only relevant for assets that are expected to be sold and for which a second
hand market exists. It is difficult to value specialized equipment with little or no
alternative use.
(ii) The exit price has little relevance for assets that the firm expect to use. The
disclosure of the cash value is not likely to be relevant to a user interested in the
company’s profitability.
(iii) There is a contradiction between the realisation principle and the established
assumption that the company is a going concern.
(iv) As with RCA an exit based system does not take in to account changes in the
general price level.
DECEMBER 2002
QUESTION ONE
Nyakuzi Limited
Consolidated Income Statement
For the year ended 31st October 2002
Sh.M
Revenue: (3250 + 500 – 150) 3,600
Cost of sales (1890 + 252 - 150 + 30) (2,022)
GROSS PROFIT 1,578
Distribution and administration: (840 + 92) (932)
Interest payable 20 + 40 (60)
PROFIT BEFORE TAX 586
Less: Income tax 150 + 60 (210)
PROFIT AFTER TAX 376
Less: Minority interest (11)
Profits attributable to group shareholders: 365
Less: dividends payable (40)
Retained profits for the year 325
Nyakuzi Limited
Consolidated Balance Sheet
As at 31st October 2002
Sh.M
Assets
Non Current Assets
Tangible assets (Wk 3) 2,878
Intangible assets : Goodwill (Wk 2) 120
Others (Wk 3) 23
Current Assets:
Net current assets (Wk 3) 1,720
Total Assets 4,741
Capital & Reserves
Ordinary share capital 650
Share premium 700
Accumulated profits (Wk 5) 1,733
Equity shareholders funds 3,053
Add: Minority interests ( Wk 2) 118
Non- current liabilities (Wk 3) 1,540
Total Equity & Liabilities 4,741

Workings:
1. Translation of subsidiary’s balance sheet and adjustment to IAS
Dinars Amortisation A/c Total Rate Sh.M

(M) Policy
Non Current Assets 3,800 3,800 4 950
Intangible assets 120 (30) 90 4 23
Net current assets 1,160 1,160 4 290
Non current liabilities (3,200) ___ (3,200) 4 (800)
Net assets 1,880 30 1,850 463
Financed by:
Ordinary shares 480 480 6 80
Share premium 180 180 6 30
Revaluation reserve 120 120 6 20
Accumulated profits:
Pre-acquisition 980 (130) 850 6 142
1,630
Post-acquisition 120 (30) 130 220 Bal. Fig 191
1,880 (30) - 1,850 463
Notes:
(a) The “market share” under intangible assets constitutes an acquired intangible asset and should be
written off over four years against post-acquisition profit.
(b) The amount written off the carrying value of non-current assets is caused by a consumption of
economic benefits and the whole deficit should remain in the income statement (IAS 36:
Impairment of assets) unless the asset is carried at revalued amount under another IAS. Any
impairment loss of a revalued asset is recognized directly against any revaluation surplus and any
excess charged against the income sttement (IAS 16: Property, plant and equipment). Post-
acquisition reserves will be affected by the write off against revaluation reserves. The damage
had not occurred at the date of acquisition and thus should not affect goodwill calculation.
(c) Changes in accounting policy under IAS 8 ‘Accounting policies, changes in Estimates and
Errors,’ should be stated as a prior year adjustment and charged against opening reserves. Thus,
the 130 million dinars should be written off against the pre-acquisition profits and added to post
acquisition profits. It is eliminated in income statement.
2. Consolidated Balance Sheet workings:
Total Pre- Post- Minority

Sh.M acquisition acquisition interests
to cost of to
control consolidated
P&L
Ordinary shares 80 64 16
Share premium 30 24 6
Revaluation reserves 20 16 4
Pre-acquisition profits 142 114 28
Post-acquisition profits 191 - 153 38
Revaluation (Note b) 128 102 26
Cost of investment (440) ___
Goodwill 120 __ 118
153
Notes:
(a) The write off of the non-current asset should not affect the revaluation reserve at the
acquisition date. Therefore at acquisition, the revaluation reserve is 120 million dinars ÷ 6 =
20 million shillings. The post-acquisition write off of 80% of 60 million dinars is shown
separately in the reserve movement.
(b)
Dinars
(M)
Revaluation (2400 dinars ÷ 6) = fair values: 400
Less: ordinary shares (80)
Share premium (30)
Revaluation reserves (20)
Reserves at acquisition (142)
Revaluation 128
3. Consolidated Balance Sheet workings:

Sh.(m) Nyakuzi Libra Fair values Inter Co. CBS
adjustment adjustments
Non-current assets 1,800 950 128 2,878
Intangible assets - 23 23
Goodwill 120
Net current assets 1,460 290 (30) 1,720
4,743

Accumulated profits 1,610 153 (30) 1,733
Non current liabilities 740 800 1,540
Minority interests 118 _118
4,743
4. Consolidated Income Statement (Workings)

(Sh.M) Nyakuzi Libra Inter Goodwill Minority Total

At S Dinars Co. Interests
To Sh.1
Revenue 3,250 500 (150) - - 3,600
Cost of sales (1,850) (252) 150 - - (1,992)
Inventory adj. (30) (30)
Distribution & Adm (840) (92) - - - (932)
Interest payable (20) (40) - - - (60)
Taxation (150) (60) - - - (210)
350 56
Minority interests 20%x56 (11) (11)
Dividends (40) - ___ ___ ___ (40)
310 56 (30) - (11) 325
Notes:
(a) Cost of sales of Libra Dinars: Millions

As per Libra’s income statement 1,200
Add: write off of market shares 30
Write off of non-current assets
*(90m – 60m) dinars transferred to
revaluation reserves 30
1,260
1260 ÷ 5
= 252
(b) The extra-ordinary item has been eliminated by transferring the amount relating to the fixed
asset (30m dinars) to cost of sales and revaluation reserve (60m dinars) and by charging
opening reserves with the catch up adjustment of 130M dinars. The balance in revaluation
reserve will be transferred to consolidated reserves and minority interests.
5. Movement on Consolidated Reserves

Sh.M
Accumulated reserves as at 1 November 2001 1,300
Retained profits for the year 325
Exchange gain: Libra 117.6
Write off of non-current asset (60m dinars ÷ 5 x 80%) (9.6)
Accumulated reserves at 31 October 2002 1,733
6. Exchange Gain Analysis

Sh.M
Gain on retranslation of opening equity interests
(1630 ÷ 6 Less: 1630 ÷ 4) 136
Exchange gain on income statement and loss on write
off of non-current assets:
Dinars: (56 x 5/4 – 56) 14
(12 x 5/4 – 12) (3)
Total exchange gain 147
80% thereof 117.6
QUESTION TWO
(a) Latema Limited
Profit and Loss Account
For the year ended 31 December 2001
Current Cost Accounting Basis:
Sh. ’000’ Sh. ’000’
Turnover: 96,000
Operating profit before interest and tax 9,350
Current cost operating adjustments (1,372)
Gearing adjustment 366 7,978
Interest payable (350) 16
7,994
Taxation (4,000)
3,994
Dividends: Interim paid (300)
Final proposed (600) (900)
Retained profits: Year 3,094
B/f 1,850
C/f 4,944
(b)
Latema Limited
Balance sheet as at 31 December 2001
Current cost accounting basis
Sh. ’000’ Sh. ’000’
Assets:
Non-current assets 12,150
Current assets
Stock 6,050
Debtors 7,248 13,298
25,448
Total assets
Equity& Liabilities
Capital and Reserves
Share premium 2,000
Loan 3,000
Current Liabilities
Bank overdraft 696
Creditors 3,500
Taxation 1,500
Proposed dividend 600 6,296
Total Equity& Liabilities 25,448

Workings:
(i) Determination of Balances to Appear in the Balance Sheet

Debtors Taxation Creditors Dividends Loan
Balance 31/12/2000 3,852 2,000 2,800 300 4,000
Add: from P & L 96,000 4,000 73,200 600 -
99,852 6,000 76,000 900 4,000
Less payments (92,604) (4,500) (72,500) (300) (1,000)
7,248 1,500 3,500 600 3,000
(ii) Revaluation surplus on Stocks

Opening stock 4,800 102/101 4,848 48
Closing stock 6,000 122/121 6,950 50
(iii) Cost of sales adjustment HCA Ratio CCA Sh.’000’

Opening stock 4,800 112/101 5,323
Closing stock 6,000 112/121 5,554
Increase in stock 1,200 231 969
(iv) Monetary Working Capital adjustment

Opening MWC 3,852
Trade debtors (2,800)
Trade creditors (1,500) (497) (a)
Bank overdraft (448) 112/101
Closing MWC
Trade debtors 5,248
Bank 1,304
Trade creditors (3,500)
3,052 112/121 2,825 (b)
Increase in MWC: b – a = 178

(v) Depreciation Adjustment
HCA Ratio CCA Sh.’000’
Depreciation expenses 1,800 135/120 2,025 225
(vi) Revaluation surplus on fixed

assets
On 31 December 2000:
Fixed Asset Cost 18,000 130/120 19,500 1,500
Accumulated depreciation 5,400 130/120 (5,850) (450)
12,600 13,650 1,050
On 31 December 2001:
Fixed asset cost 18,000 135/120 20,250 2,250
Accumulated depreciation (7,200) 135/120 (8,100) (900)
10,800 12,150 1,350
(vii) Calculation of prior years backlog depreciation
CCA: Accumulated depreciation c/f on 31/12/2001 8,100

Less: CCA Accumulated depreciation b/f 5,850
HCA depreciation expense 1,800
Depreciation adjustment 225 (7,875)
Prior years backlog depreciation 225
(viii) Determination of Current Cost Reserve to be used in calculating of Gearing

Adjustment
Sh.’000’ Sh.’000’
Bal b/d 1,900
Revaluation surplus
On stocks (50 – 48) 2
Bal c/d 2,202 Fixed assets (1350 – 1050) 300
2,202 2,202
Bal b/d 2,202
(ix) Determination of Gearing Adjustment
2000 2001
Shareholders funds
Ordinary shares 6,000 6,000
Proposed dividends 300 600
12,050 16,752
Borrowings:
Loan 4,000 3,000
Taxation 2,000 1,500
6,000 4,500
12,050 + 16,752
Average shareholders funds = = Sh.14,401
2
6,000 + 4,500
Average borrowings = = Sh.5,250
2
5250
Gearing proportions = x100 = 26.7%
14,110 + 5250
Gearing adjustment: 26.7% + Sh.(969 + 178 + 225) = Sh.366

(x) Determination of current cost reserve to appear in CCA balance sheet as at 31.12.2001
Current Cost Reserve
Sh.’000’ Sh.’000’
CCA Acc. Deprec backlog Bal b/d 1,900
Depreciation 225 Revaluation surplus of:
Gearing adjustment 366 Fixed asset (20250 – 19500) 750
Balance c/d 3,208 Stocks (50 – 48) 2
Profit & Loss A/c
COSA 969
____ MWCA 178
3,799 3,799
Balance b/d 3,208
QUESTION THREE
(a) If undue importance is place on EPS figure, it is possible that this causes too simplistic
interpretations of financial performance. EPS deals with the analysis rather than financial
reporting. The purpose of EPS is to allow comparability between companies. However, the
earnings stated in corporate reports are not necessarily comparable with each other because
of differing accounting policies and there will be different levels of earnings from non-
trading transactions, which will not be representative of a company’s earnings potential.
Additionally, the level of taxation suffered may not be consistent between companies. Thus,
there may be problems if the EPS figure is used for investment purposes or as part of the
price earnings ratio when valuing a company’s shares, if the inconsistencies in corporate
financial reporting are not taken into account and a wider range of information about the
company is not provided.
(b) Sh. ’000’

Net profit 146,000
Less: Preference Dividends:
Sh. 10M @ 3% (300)
Sh.4M @ 3% (120)
Net profit available to ordinary shareholders: 145,580
(i) Weighted Average Number of shares

Shares Period Weighted average
shares ‘000’)
1 June – 31 Aug Ordinary shares issued 60,000 3/12 15,000
1 Sep 01 Additional shares 12,000
1 Sep–1 Dec 01 72,000 3/12 18,000
1 Dec 2001 Pref. Shares converted 3,000
1 Dec 01 – 1 Jan 02 75,000 1/12 6,250
1 Jan 02 Partly paid Ord. Shares
50% div. 1,500
76,500 3/12 19,130
1 Apr 2002 Conversion of loan 1,500 13,000
stock 78,000 2/12 71,380
Sh.145,580
Basic EPS = = Sh.2.04
71,380
(ii) Calculation of Anti-dilutive potential Sh.’000’ Ordinary EPS

ordinary shares shares
(000)
Profit from continuing ordinary share: Less
Preference dividend
(Sh.146M – 33M – 0.42M) 112,580 71,380 1.58
Warrants: - 850
112,580 72,230 1.56
Partly paid shares - 300
112,580 72,530 1.55
Convertible preference shares 420 3,500
113,000 76,030 1.49
Convertible loan stock 6,710 5,750
119,710 81,780 1.46
All potential ordinary shares have a dilutive effect. Therefore all of these potential ordinary
shares are included in the diluted EPS calculation. The sequence of the potential ordinary
shares is from the most to the least dilutive.
(iii) Diluted EPS
Sh.’000’
Net profit available to ordinary shareholders 145,580
Adjusted for: Interest on loan stock 6,710
Preference dividend 420
152,710
Weighted Average No. of shares Sh.’000’

As per basic EPS 71,380
Add: Shares applicable to:
Partly paid shares (1.5N – 1.2M) 300
200M 10 150M 2
Convertible loan stock: x30x x x30x 5,750
1000 12 1000 12
Convertible preference shares:
(Shs.10M ÷ 2 x 6/12 + 4,000 ÷ 2 x 6/12) 3,500
Warrants [(6M x 6.6) ÷ 10 – 3.9M] x 5/12 850
81,780
Sh.152,710
Diluted EPS = =Sh.1.87
81,780

Other workings:
Sh.’000’
Interest on loan stock 10,000
Sh.200M x 5% (420)
9,580
Tax thereon: @ 30% (2,870)
6,710
Preference Dividend::
Sh.10M x 3% 300
Sh.4M x 3% 120
420
QUESTION FOUR
(a)
Taabu Limited
Capital Reduction Account
Sh.’000’ Sh.’000’
Profit and Loss 14,400 Preference dividends 14,400
Ordinary share capital: dividends 4,800 Preference shares @ 2.50 per share 20,000
Patents 10,500 Ordinary shares @ 8.00 per share 120,000
Goodwill 28,000 Director’s loans: 5% x 20M 1,000
Deferred advertising 20,000 Sale of investment: Gain 17,000
Stock 15,000 Transfer of freehold gain 4,000
Provision for bad debts 11,700 Revaluation of freehold 12,500
Penalty on cancelled contract 2,500 _____
188,900 188,900
(b)
Taabu Limited
Balance sheet as at 1st July 2002
Sh.’000’ Sh.’000’ Sh.’000’
ASSETS
Non Current Assets
Freehold property 77,500
Plant 10,000
87,500
Current Assets
Stock 70,000
Debtors 85,300
Bank _2,000
TOTAL ASSETS 244,800
EQUITY&LIABILITIES
CAPITAL&RESERVES
Authorised share capital
8% cumulative preference shares of Sh.10 each 80,000
Ordinary shares of Sh.10 each 150,000
230,000
Issue and fully paid capital
8% cumulative preference shares 60,000
Ordinary shares of Sh.10 each _52,800
112,800
Non current liabilities
6% debentures (secured) 51,000
12% debentures (secured) 26,000 _77,000
189,800
Current Liabilities
Creditors 45,000
Accruals 10,000 55,000
TOTAL EQUITY&LIABILITIES 244800
Workings:
Bank A/c
Sh.’000’ Sh.’000’
8% Debentures 26,000 Bal b/f 39,000
Sale of Investments 25,000 Debenture interests 4,500
Directors loans 1,000
Penalty 2,500
Creditors 5,000
_____ Balance c/d 2,000
51,000 51,000
Bal b/d 2,000
QUESTION FIVE
(a) Key issues include:
Staff: Increased wage levels or new working conditions
Social: Access to education and stakeholder appraisal
Educational: Public social development in schools and businesses
Cultural: Increases in social responsibility and social development
Environmental: New production processes with reduced environmental damage
Legal: New laws or statute books
Shareholders: Profit levels, dividend pay out ratio etc
Customers: Product quality and safety
Government:: Level of taxes paid from profits.
(b) Benefits
Development of policies and strategies based on understanding of current
performance and future expectations
Targeting of management systems to deliver expected outcomes
Strengthened relationships with all key partners and stakeholders
Enhanced public reputations
Competitive advantage to secure long term viability
Tax relief from the government
Avoiding Government intervention through regulations and imposition of penalties.

(c) Practical challenges

There are no laws e.g the Companies Act which will reinforce the reporting of the
social activities of the firm. The Companies Act reflects the interests of the
shareholders and not the society as a whole.
Markets do not reward ethical companies i.e social responsibility accounting is not
reflected in companies market prices.
There are no common accounting benchmarks to measure the attainment of social
responsibility.
A company’s management will be biased in that it will not be willing to report
company activities with negative impact on the society.
It is dismissed as a public relations issue, not an accounting one.
It involves extra work, time and cost
Benefits from social responsibility accounting are hard to quantify.
The business of the business is to do business and remain in business, not to
undertake social responsibility activities.
JUNE 2003
QUESTION ONE
(a) Under IFRS 5 a disposal group or a Non-current Asset should be classified as a ‘held-for-sale’
when all of the following conditions are met:
• The asset is available for immediate sale.
• The sale is highly probable within 12 months of its classification.
• The asset is being actively marketed.
• Management is committed to the sale.
• It is unlikely that the plan to sell the asset will be significantly changed or withdrawn.
(b) The information provided on R Ltd is not enough to establish exactly when the classification
as a ‘Held for sale’ was met. However, the disclosure requirement of IFRS 5 will apply since
the Subsidiary R Ltd was fully disposed.
(c) (i) A description of the discontinued operation.

(ii) The business segment in which it is reported in accordance with IAS 14 ‘Segment
Reporting’
(iii) A description of the facts and circumstances of the sale, or leading to the expected
disposal and the expected manner and timing of that disposal.
(iv) The gain or loss on the disposal.
(v) The revenue, expenses and pre-tax profit or loss of discontinued operation presented as a
single amount or on a separate column labeled ‘Discontinued operation’ on the face of
Income Statement.
(d) If the recognition criteria as a ‘Held for Sale’ had been met before the approval of the financial
statements then the disclosure requirements under IFRS 5 should be applied as a prior year
adjustment to ensure that the financial statements to be produced are not misleading.
(e) Workings:
(i) Goodwill arising on acquisition
Q Ltd. R Ltd.
Costs of investments 680 570
Net Assets acquired
600 600
Q Ltd.: 80% : R Ltd.: 75% (480) (450)
200 120

(ii) Loss on sale of subsidiary
Proceeds from sale (570 770

+ 200)
Dividends received not
earned 200 x 0.75 x 4/12 50
820
Net assets disposed
Share capitals 400
Retained earnings 700
brought forward
Retained earnings for 8
months
Profit for the 210
year
10 6.67
8/12 *
1106.67 (830)
75% * (10)
(120)
Goodwill (130)
unammortised
Loss on disposal
(iii) Consolidated profit and Loss Account

Sh. ‘million’
COC 80% X 100 80 P LTD 1510
M.I 128 Q Ltd 640
Consolidated balance sheet 1942 ____
2150 2150
(iv)
Minority interest
Consolidated 228 Ordinary shares 100
Balance sheet Retained earnings 128
228 228
(v) Calculation of Consolidated Retained Reserves brought forward as at 1 Jan 2002
P Ltd
Retained profit as at 31 Dec 2002 1,510
Less: Profit for the year net of dividends (1165 – 500) = (665)
Profit b/fwd for P Ltd as at 1.1.2002 845
Add: Group share of subsidiaries’ Post acquisition profits
Q Ltd
Retained profit as at 31 December 2002 640
Profit b/fwd for Q Ltd as at 1.1.2002 450
Less: Pre Acquisition Profits (100)
Post acquisition profits of Q Ltd 350
Group share of Post Acquisition Profits (350 x 80%) = 280
R Ltd
Retained profit as at 31 Dec 2002 710
Profit b/fwd for R Ltd as at 1.1.2002 700
Less: Pre Acquisition Profits 200
Post Acquisition profits of R Ltd 500
Group share of Post Acquisition Profits (500 x 75%) = 375
Consolidated Retained Reserves b/fwd as at 1.1.2002 1,500
(vi)
P Limited and its Subsidiaries

Consolidated income Statement
for the period ended as at 31 December 2002.
Continuing Discontinued Enterprise as a
operations operation whole
Sales 10200 2400 12600
Cost of sales 5900 1600 7500
Gross profit 4300 800 5100
Expenses (2700) (600) (3300)
Operating profit 1600 200 1800
Finance costs (75) (75)
Loss on sale of subsidiaries (130) _____ (130)
Taxation (460) (60) (520)
Minority interest (98) (35) (133)
Net profit for the period 837 105 942

(vii)
P Limited and its subsidiaries
Consolidated Statement of changes in equity
for the period ended 31 December 2002.
Retained earnings
Sh. million
As at December 31.2001 (see working V) 1500
Net profit for the period 942
Dividend paid (500)
As at December 31 2002 1942
(viii)
P Limited and its subsidiaries
consolidated Balance Sheet
As at 31 December 2002.
ASSETS
Non-current Assets
Property, plant and equipment 2,300
Goodwill arising on acquisition 200
Current assets 1,300

Total assets 3,800
EQUITY&LIABILITIES
Capital&reserves
Retained earnings 1,942
Shareholders funds 2,442
Minority interest 228
2,670
Non-current liabilities 100
Current – liabilities 1,030
Total equity&liabilities 3,800
QUESTION TWO
Share capital and Premium
Cash book issue cost 2 Bal b/d share capital 300
Bal. b/d share premium 84
Bal c/d C.B 130
Share capital 400
Share premium 112 ______
514 514
(2) Dividend paid to minority

Minority interest
Subsidiary Bal b/d 21
10% x 40 4
Shareholders 4
Bal c/d 13
21 21
(3)
Bank loan
Subsidiary 18 Bal c/d 52
Cash book 5
Bal c/d 29
52 52
(4)
Tax paid
Deferred Tax Interest b/d 2 Deferred liability b/d 17
Tax recoverable 9 Current tax b/d 2
Current tax - Tax for the year 2
Deferred tax liability balance c/d 18 Tax recoverable 2
Subsidiary 1 Deferred tax Asset c/d 16
Deferred tax 13
Cash 5 _____
48 __48___
Finance lease
Balance brought down 2
Balance brought down 8
Cash book 8
Balance c/d 2 ____

10 10
Accumulated depreciation Account

Disposal 8 Balance b/d 135
Subsidiary 13 For the year 65
Balance c/d 161 ______

200 200
Property, plant and equipment

Balance b/d 769 Disposal b/d 11
Cash 65 Subsidiary 118
Balance c/d 705
______ ______
834 834
Goodwill arising on acquisition

20% x 90 = 18
Paid 28
Goodwill on 10
Subsidiary

Profit on disposal on property, plant and equipment

Proceed 9
Net book value
Cash 11
Depreciation 8 3
Profit 6
Inventories
Balance b/d 225 Subsidiary 27
Decrease 40
_____ Balance 158
225 225
Trade and other receivables

Balance b/d 134 Subsidiary 41
Increase 10 Balance c/d 103
144 144
Trade and other payables

Subsidiary 38 Balance 188 – 5 =183
Decrease 34
Balance 112 – 1 111
183 183
Interest paid
C-B- Finance lease 2 Balance b/d 5
CB – other 37 P&L 35
1
40 40
Amortisation of goodwill
Goodwill arising on acquisition 10
Amortisation 5
Unamortized 5
Amortisation
Subsidiary 5 Balance b/d 25
For the year 4
Balance c/d 24 ____

29 29
Proceed from disposal of subsidiary

Net assets
90% X 40 36
Goodwill unamortized 5
Profit on sale of subsidiary 19
60
Proceeds from sale of subsidiary net of cash & cash equivalent disposable.
Proceeds 60
Subsidiary cash & bank balance 3
Bank overdraft (61) 58
118
Great Mountain consolidated cash flow statement for the period ended 31st March 2003
Cash flow from operating activities
Loss before tax (46)
Adjusted for:
Depreciation 65
Amortisation 4
Profit on sale of property, plant and equipment (6)
Interest expense 35
Profit on sale of subsidiary (19) (79)
Operating profit before working capitals changes 33
Working capitals changes
Decrease in inventory 40
Trade and other receivable (increase) (10)
Trade and other payables (decrease) (34)
Decrease in provision for liabilities and changes (1) (5)
Cash generated from operations
Interest on finance lease paid (2)
Interest on bank overdraft and other loans (37) (39)
(11)
Tax paid (5)
Net cash flow from operating activities (16)
Cash flow from investing activities
Proceeds from sale of subsidiary 118
Proceeds from sale of property plant and equipment 9
Purchase of property, plant and equipment (65)
Net cash from investing activities 62
Cash flow financing Activities
Proceeds from issues of shares 130
Payment of issue cost (2)
Repayment of bank loan (5)
Repayment of finance lease (8)
Changes in cash equipment 161
Cash and cash equivalent 161
Cash and cash equivalent beginning
Bank overdraft (246) (241)
Cash and cash equivalent ending (80)
Bank overdraft (83) (80)
QUESTION THREE
(a) M & I Bank Limited
JOURNAL Dr Cr
Sh. ‘000’ ‘000’
Land a/c 40
Revaluation Reserve a/c 40
Being the amount required to reflect the revaluation upwards of the
HO land at 30 June 2002
Buildings a/c 22
Depreciation on Building a/c 22
Being the write back of accumulated depreciation for the period 1 July

1991 to 30 June 2002: 11 years x 100/50 (the question states that the
2002 depreciation charge for the HO building will not change)
Building a/c 390

Revaluation reserve a/c 273
Deferred tax a/c 117
Being the revaluation of the HO building from Sh. M (100 – 22) =
Sh.M78 to Sh.468m i.e. by Sh.390m and the transfer of this uplift to
revaluation reserve and to Deferred tax a/c as required by IAS 12, as
at 30 June 2002
Investment Building a/c 10

Depreciation on investment building a/c 6
Retained earnings b/f 13
Deferred tax b/f (30% x 10 = 3) 3
Being the prior period adjustment in relation to the investment
building
P & L a/c: Depreciation on HO Building 12

Accumulated depreciation on the HO Building 12
Being the depreciation charge on the HO Building for the year ended
30 June 2003 (468/39 = 12)
P & L a/c: Amortisation of pre-paid operating lease rental 2

Accumulated amortization of prepaid, operating lease rental 2
Being the amortization for the year
In statement of changes in Equity:

Revaluation reserve 7
Retained earnings 7
Being the transfer from revaluation surplus to retained earnings (but
NOT in the income statement) to reflect the partial realization of the
surplus as the asset is used
(273/39 = 7)
Disclose credit in income statement

Deferred taxation 3
Tax charge in Income statement 3
Being the deferred tax released on the surplus (or excess)
depreciation on revalued amount =12
Depreciation on historical cost =2
Surplus realized in year 10
Tax thereon (3)
Net surplus realized in year (above) 7
Investment Building a/c 8

P & L a/c: Gain on fair value adjustment 8
Being the gain on the fair value of the investment building for the year
P& L a/c Deferred tax charge 2.4

Deferred tax a/c 2.4
Being the deferred tax charge on the gain from the fair value
adjustment on the investment building
(b) Balance Sheet Extracts as at 30 June

2002 2003
Sh. M Sh M
Non current assets
Land (valuation at 30 June 2002) 468 468
Building: valuation at 30 June 2002 - (12)
Accumulated depreciation 468 456
Net book value 102 102
Pre-paid operating lease rentals paid (2) (4)
Accumulated amortization 100 98
Net book value
Investment property: Cost at 1 July 01/ value at I July 01 b/f 300 310
Gain from fair value adjustment 10 8
Valuation c/f 310 318
Deferred tax 120 119.4
c) Income statement Extracts for the year ended 30 June

2002 2003
Sh.M Sh.M
Amortisation of pre-paid operating lease rental (2) (2)
Depreciation of H.O Building (2) (12)
Depreciation of inv. Property (comparative restated) - -
Gain on fair value adj. of inv property (comparative restated) 10 8
Rental income received from inv. Property 24 54
Direct operating expenses, including
Repairs and maintenance ___ ___
Floors in use (6) (12)
Floors not in use _(6) _(5)
(12) (17)
Net rental income from investment property 12 37
Deferred taxation on owner-occupied
Building released - 3
Deferred tax on fair value adjustment (3) (2.4)
(3) 0.6

QUESTION FOUR
(a). Sumias Sugar Company Ltd
2003 2004
Sh.million Sh.million
Accounting profit/loss (110) 150
Deduct: Income(capital gain) not
chargeable tax 20 10
(130) 140
Add back: Expenses not allowable 10 20
120 160
Add back: depreciation 120 130
Nil 290
Deduct: Capital allowable (50) (80)
(50) 210
Tax loss b/f (20) (70)
Tax loss c/f (70) -___
Taxable income. Nil 140
(b). Income statement for the year ended

31 March 2003 31 March 2004
Loss/profit before tax (110) Dr. 150 Cr
Tax (charge)/credit
Current taxation based on adjusted profit
for the year at 30% Nil (42) Dr
Deferred tax 36 Cr (6) Dr
36 Cr (48) Dr
(Loss)/profit after tax (74) 102 .
QUESTION FIVE
(a). IAS 1 encourages enterprises to present, outside the financial review by main features of the
enterprise’s financial performance and financial position and the principal uncertainties it
faces. Such a report may included a review of:
(1). The main factors and influences determining performance including changes in the
environment in which the enterprise operates, the enterprise’s response to those
changes and their effect, and the enterprise’s policy for investment to maintain and
enhance performance including its dividend policy.
(2). The enterprise’s sources of funding, the policy on gearing and its risk management
policies and
(3). The strengths and resources of the enterprise whose value is not reflected in the
balance sheet under IFRS.
(b). IAS 1 encourages enterprises to present such additional statements if management believes
they will assist users in making economic decisions. Such statements are particularly useful
for industries where environmental factors are significant and where employees are
considered to be an important user group.
(c). (i). Price risk. There are three types of price risk, currency risk, interest risk and
market risk.
(ii). Currency risk is the risk that the value of a financial instrument will fluctuate due to
changes in foreign exchange rates.
(iii). Interest risk is the risk that the value of a financial instrument will fluctuate due to
changes in market interest rates.
(iii). Market risk is the risk that the value of a financial instrument will fluctuate as a
result of changes in market prices whether those changes are caused by factors
specific to the individual security or its issuer or factors affecting all securities traded
in the market.
Credit risk: The risk that are partly to a financial instrument will fail to discharge an
obligation and cause the other party to incur a financial loss.
Liquidity risk (or funding risk): The risk that an enterprise will encounter difficulty in
raising funds to meet commitments associated with financial instruments.
Cash flow risk: The risk that future cash flows associated with a monetary financial
instrument will fluctuate in amount.
(c). “The guidelines on corporate Governance Practices by public listed companies” states in
relation to the annual report and accounts the following.
“the board (of directors) should present and objective and understandable assessment of the
company’s operating position and prospects. The board should ensure that the accounts are
presented in line with IAS.
The extent of compliance with the guidelines should form an essential part of disclosure
obligations in corporate annual reports. Every listed company must disclose in its annual
report a statement of the directors as to whether the company is complying with the
guidelines on corporate governance.
It is equally important that disclosure of areas of non-compliance or alternative practices be

made a part of these disclosure requirements.. Where the company is not fully compliant
with the guidelines, the directors must indicate the steps the company will take to adhere to
full compliance.

DECEMBER 2003
QUESTION ONE
ZDC Ltd. and its subsidiary
Consolidated profit and loss account
for year ended 31 December 2002
Acquisition Merger
Sales 5,700 6,900
Cost of sales (4,249) (5,144)
Operating expenses (760) (925)
Amortisation of premium __(10) _(10)
Operating profit 681 821
Finance costs (50) (50)
Share of profit of associate 40% x (150 – 10) _56.00 __56
Profits after tax 687 827
Taxation – Group (255) (305)
Share of associate (23.2) (23.2)
408.8 498.8
Minority interest __(6.1) (15.1)
Profit attributable to members 402.7 483.7
Dividend paid (100) (145)
Dividends proposed __(100) (100)
202.7 238.7
Retained profits for the year __410 591.5
Retained profits brought forward 612.7 830.2
ZDC Ltd.
Consoldiated Balance Sheet
as at 31 December 2002
Acquisition Merger
Assets
Non current assets
Property, plant &equipment 2,150 2,150
Investments in associate 210.8 210.8
Goodwill arising on acquisition 82.5
Current assets __1,048 1,048
3,491.3 3,408.8

Share capital 1,480 1,480
Share premium 300
Profit and loss account _612.7 _830.2
2,392.7 2,310.2
Minority interest 78.6 78.6
Loan 500 500
Current liabilities __520 __520
Total equity& liabilities 3,491.3 3,408.8
Workings:
Acquisition Merger
Sh.’million’ Sh.’million’
(i) Sales:
ZDC Ltd 4,500 4,500
ADL Ltd 1,500 3,000
Inter-company (300) ( 600)
5,700 6,900
(ii) Cost of sales

ZDC Ltd 3,325 3,325
ADL Ltd 1,200 2,400
Inter-company
Overstatement of opening stock (5)
Cost of sales (276) (576)
4,249 5,144
Note:
*Acquisition
It is assumed their 1/5 x 600 of the goods sold by ADL to ZDC are from
the last batch sold. The valuation of inventory is assumed to be based on
FIFO approach. The inter-company cost of sales was determined as
follows:
Cost ADL 240

Markup on goods sold by ZDC
(300 – 600 x 1/5) x 25/124 36
276
Acquisition Merger
(iii) Goodwill arising on acquisition 780
Investment in ADL 24 x 32.50
Net assets acquired
Share capital 500
B/f 240
1st January to June 30th 35
90% x 775 (697.5)
82.5
NB: ZDC has not recognized dividends paid by ADL and the proposed
dividends of ADL do not contain any pre-acquisition dividends.
(iv) Merger debit

Share issued by ZDL Ltd 24 x 20 480
Shares exchanged by ADC Ltd 90% x 450
500 30

(v) Minority interest Acquisition Merger

Sh.’Million’ Sh.’million
Profit after tax 8.5 17
Unrealized profit on inter-company
Opening stock 10% x (25 x 20%) 0.5
Closing stock 2.4 2.4
6.1 15.1
(vi) Premium arising on acquisition
Cost of investment 210
Net Assets Acquired
Share capital 300
Profit & loss 100 (160)
60% x 400 50
(vii) Retained profits brought forward Acquisition Merger

Sh.’Million’ Sh.’million
ZDC Ltd 408 408
Major debit (30)
Premium amortised 50/5 x 3 (30) (30)
378 348
ADC Ltd 216
UPS ___ (4.5)
___ 211.5
BSL 32 3 2
TOTAL 410 591.5
(viii) Investment in Associate

Bal b/d 210 Premium amortised 40
Post-acquisition UPS 4
Profit (40% x (212 – 100) 44.8 CBS 210.8
254.8 254.8
(ix) Minority Interest

UPS (10% x 24) 2.4 Share capital 50
CBS 78.6 Profit & Loss A/c 31
81 81
(x)
Current Assets Current Liabilities
ZDC 700
ADL 360 ZDC 315
Dividends receivable from ADL 250
associate (40% x 30) 12 Intercompany proposed
Unrealised profit on stock (24) dividends (45)
1,048 520
TUTORIAL NOTE
1. Focus on the aquisition method of accounting not the merger method. The merger method
was rendered inapplicable by virtue of IFRS 3.
2. Also, goodwill arising on consolidation should not be amortised.
QUESTION TWO
(a) (i) IAS 14 requires companies to identify a primary reporting format (by
product/activity or geographic area) for its segment. The required information for
the primary reporting formal is:
i. Sales revenue
ii. Segments results
iii. The basis of inter-segment pricing
iv. Carrying amount of segmental assets
v. Segmental liabilities
vi. Any addition to segment non-current operating assets during the year.
vii. Any other significant non-cash expenses
(ii) Benefits of segmental information/reporting
Segmental information would assist users of financial information to

analyse the prospects of a business. This is important when evaluating the
elements of the business.
Improves the ability of analysts to assess the risks relating to the separate
segment of a business especially where companies volunteer segmental cash
flow information.
(iii) Problems with segmental reporting
There are problems with defining what a reportable segment should be.
It may be difficult to apportion common expenses e.g central

administration overheads, research and development.
Finance costs may also be difficult to apportion because firms borrow

funds as an overall financial strategy which is not related to individual
segments.
Disclosure of detailed segmental information may be of benefit to

competitors and therefore has the potential to harm the disclosing
company.

Segmental report for Wengi Ltd. for the year to 31 October 2003
Revenue Engineering Chemicals Supermarket Elimination Consolidated
Sh. Sh. Sh. Sh. Sh.
’million’ ’million’ ’million’ ’million’ ’million’
External sales 400 300 200
Inter segment sales _20 _40 __- (60) 900
Total sales 420 340 200 60
Segmental results 45 79 25
Unallocated
expenses (37)
Central
administration (12)
Interest (on 100
debentures 10% of
120)
Profit before tax 328 282 130 740
Other information
Segment/
consolidated assets (140) (120) (30) (290)
Segment/
consolidated (120)
liabilities
Unallocated (410)
corporate liabilities
Consolidated total
liabilities
Amortisation of (6) (14) (20)
goodwill
Workings
Engineering Chemicals Supermarket
Cost of external sale 80% x 400 = 320 60% x 300 = 180 75% x 200 = 150
Inter-segment cost of sales 20 60% x 40 = 24 Nil
Distribution Sh.24 million Sh.38 million Sh.25 million
Goodwill amortisation Sh.6 million Sh.14 million Nil
Interest costs
(22-12 allocate 50:50) 5 5 Nil
total apportioned costs 375 261 175
total sales (420) (340) (200)
Segmental profit Sh.45 million Sh.79 million Sh.25 million
Segment net assets:
Engineering Chemicals Supermarket

Sh. Sh. Sh
’million’ ’million’ .’million’
Goodwill 60x30% 18 60x70% 42 Nil
Owned non current 150 120 100
assets 90 (150x40%) 60 Nil
Leased assets (150 x 70 60 30
60%) 328 282 130
Current assets
(40) (20) (30)
Segment liabilities
Current liabilities (100) (200x50%) (100) Nil
Lease obligations (140) (120) (30)
(200 x 50%)
QUESTION THREE
(a) (i) Monetary working capital adjustment
Monetary working capital is the aggregate of (i) trade debtors, prepayments and trade bills
receivable and (ii) stock not subject to a cost of sales adjustment, less (iii) Trade creditors,
accruals and trade bills payable.
Monetary working capital adjustment is required to give effect, in the historical profit and
loss account, the increase or decrease in the replacement cost of monetary working capital.
(ii) The gearing adjustment
If a business is financed by borrowed money – the lenders must share in the burden of
inflation along with the owners. The gearing adjustment is calculated to pass the effect of
current cost operating adjustments to the lenders, by using the gearing fraction to
shareholders funds. The current cost operating adjustments are COSA, Depreciation
adjustment and MWCA. The gearing adjustment is calculated using the following formula.
L
Ax Where: A = Current cost operating adjustments
L+S
L = Net borrowing
S = Shareholders funds – which also
includes preference share capital.
Limitations of current cost accounting
(i) There may be stock fluctuating especially where there are seasonal stocks. The
average used for COSA may not be appropriate. Usually, businesses prefer to keep
smaller stocks at the year-end to avoid stocktaking costs.
(ii) A large amount of information is required to prepare current cost accounts.
(iii) The diversity of accounting policies and methods of presentation adopted by

companies makes comparison difficult.

(iv) The installation of the CCA system involves time and cost.
(v) The audit of CCA accounts is difficult
(vi) It lacks precision. Calculations are both subjective and tedious.
(c) (i) Tosha Ltd. current cost profit and loss account for the year ended 31
December 2002
Current cost operating adjustments:
Cost of sales adjustment 78
Depreciation adjustment 30 108
247
Interest 60
Gearing adjustment (32) 28
Current cost profit before tax 219
Current cost profit after tax 69
Retained profit – 1 January 2002 180
249
(ii) Tosha Ltd. current cost balance sheet as at 31 December 2002
Sh.’million’ Sh.’million’ Sh.’million’

Share capital 700 PPE (net) 825
Retained profit 249 Current assets:
Current cost reserves 282 Stock 906
15% Debentures 400 Cash 50
956
____ Net current assets 806
1,631 1,631
Workings:
1. Cost of sales adjustment Difference

Opening stock: 628 – 600 = 28
600 x 136 = 628
130
Closing stock 900 x 136 = 850 850 – 900 = 50

__ 144 ___ __
300 222 78
2. Value of closing stock under current cost Current cost reserve
Opening stock 600 x 132 = 609 609 – 600 = 9

130
Closing stock 900 x 145 = 906 906 – 900 = 6

144 15
3. Depreciation adjustment:
Current year depreciation = 125
Current cost depreciation
125 x 124 = 155

100
Current cost depreciation adjustment

= 155 – 125 = 30
4. Values of net fixed assets for current cost balance sheet.

Current cost reserve
31.12.2001 750 x 120 = 900 900 – 750 = 150
100
31.12.2002 625 x 132 = 825 825 – 625 = 200

100
5. Gearing adjustment 31.12.2001 31.12.2002

Corporation tax 100 150
Cash (30) (50)
Debentures 400 400
470 500
Average = 470 + 500 = 485
2
Gearing ratio = 485 _____

485 + 1,135*(1)
Gearing adjustment: Sh.”million”
78
COSA 30
Depreciation adjustment 108
Gearing adjustment = 108 x 0.3 = 32
6. Current cost reserves: Sh.”million”

Opening balance: Stock 9
Fixed assets 150
159
COSA 78
Increase in fixed assets 50
317

Less: Reduction – stock (3)

Gearing adjustment (32)
Closing balance 282
(1) 31.12.2001 31.12.2002

Sh.”million” Sh.”million”
Capital and reserves 880 1,025
Current cost reserve (stocks) 9 6
Current cost reserve (assets) 150 200
1,039 1,231
1,039 + 1,231 = 2,270 = 1,135
2 2
QUESTION FOUR
ACCOUNTANTS’ REPORT
The Directors
Gwano Ltd.
P O Box
Nairobi
15 July 2003
Gentlement
1. We have examined the audited financial statements of Gwano Ltd. (the company) for the five years ended
31 March 2003.
2. We are the auditors of the company and have acted as auditors of the company for the periods covered by
this report.
3. No audited financial statements for submission to the members of the company have been prepared in
respect of any period subsequent to 31 December 2003.
4. The information set out in paragraphs 7 to 10 is based on the audited financial statements of the company,
after making necessary adjustments to the audited accounts we consider appropriate for the inclusion of
our report in the prospectus.
5. The audited financial statements have been prepared on the basis of the accounting policies set out in
paragraph 7. For all the accounting periods dealt with in this report except for the two accounting years
ended 31 March 2000, the audited financial statements have been prepared in accordance with
International Accounting Standards.
6. In our opinion, the information set out in paragraphs 7 to 10 gives, for the purpose of prospectus, a true
and fair view of the profit of the company for the period 1 April 1998 to 31 March 2003 and the state of
affairs of the company as at 31 March 2003.
7. Accounting Policies:
The significant accounting policies that have been adopted in arriving at the financial information set out
in this report are as follows:
(i) Basis of Accounting
The company prepares its financial statements on the historical cost basis of accounting.
(ii) TURNOVER
The turnover is the net aggregate amount receivable for goods supplied and services rendered.
(iii) TAXATION
The company provides for tax expense based on deferred tax method.
(iv) FIXED ASSETS
Fixed assets are stated at cost less depreciation.
(v) DEPRECIATION
No depreciation is provided on freehold property.
Depreciation is provided on plant and machinery and furniture at the rate of 10% per annum on
a straight line basis based on cost.
(vi) STOCK
Stock is stated at the lower of cost and net realizable value.
(vii) DEBTORS
Debtors are stated net of specific provision for doubtful debts.

(viii) QUOTED INVESTMENTS
Quoted investments are stated at cost.
8. PROFIT AND LOSS ACCOUNTS
The profit and loss accounts for each of the five years ended 31 March 2003 after making necessary
adjustments to audited accounts are set out below:
2003 2002 2001 2000 1999

Notes Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Revenue 10 (a) 37,600 33,000 27,000 24,500 20,000
Cost of sales 27,000 24,300 19,800 17,600 14,300
Gross profit 10,600 8,700 7,200 6,900 5,700
Admin expenses 2,400 1,700 1,400 1,300 1,100
Selling & distribution exp 1,700 1,300 1,200 1,100 950
4,100 3,000 2,600 2,400 2,050
Finance cost 480 480 480 480 480
Profit before tax 6,020 5,220 4,120 4,020 3,170
Tax 2,400 2,100 1,650 1,600 1,300
Profit after tax 3,620 3,120 2,470 2,420 1,870

Extraordinary income 10 (b) ___- ___- _360 ___- ___-
Dividends 10 (c) 4,620 3,120 2,470 2,420 1,870
Retained profit 1,600 1,280 _960 _600 _500
2,020 1,840 1,870 1,820 1,370
Earnings per share 10 (d) Sh 4.5 Sh 3.9 Sh 3.5 Sh 3.0 Sh 2.3
9. BALANCE SHEET
The balance sheet of the company as at 31 March 2003 after making necessary adjustments to the audited
balance sheet is set out below:
BALANCE SHEET OF THE COMPANY AS AT 31 MARCH 2003

Notes Sh.’000’ Sh.’000’
ASSETS
Non-current assets
Freehold property 10(e) 8,500
Furniture 10(f) 4,200
18,900
Current assets
Stocks 10(g) 5,200
Debtors 4,200
Quoted investments 10(h) 3,600
Prepayments 1,200
Bank balance 850
15,050
33,950
EQUITY AND LIABILITIES
Ordinary shares 10(i) 16,000
Share premium 2,000
Profit and loss account 10(j) 4,200
22,200
Deferred tax 1,050
6% debentures 4,000
8% debentures 10(k) 3,000
8,050
Current liabilities
Accruals 500
3,700
Total equity & liabilities 33,950
10. NOTES TO THE FINANCIAL STATEMENTS
(a) TURNOVER
The turnovers of the three accounting years ended 31 March 2001 include
turnover from a wholesale branch which was sold off in 2001.
The turnover of this branch was as follows in the accounting years ended 31
March
Sh.
1999 2,100,000
2000 1,800,000
2001 1,350,000

(b) EXTRA ORDINARY INCOME
The income was the net profit after 40% tax resulting from sale of the wholesale
branch.
(c) DIVIDENDS
The dividend rate on the Sh.20 ordinary shares outstanding at the end of each year
and ranking for dividends were as follows:
2003 2002 2001 2000 1999

(d) EARNINGS PER SHARE
The earnings per share is based on net profit after extra-ordinary items and on
800,000 ordinary shares outstanding on 31 March 2003.
The earnings per share for the accounting years ended 31 March 1999 and 2000
have been re-computed for comparison purposes because of bonus shares issued
in the accounting year ended 31 March 2001.
(e) FREEHOLD PROPERTY
Market value of the freehold property on 31 March 2003, was Sh.12 million
(f) FURNITURE
The value of furniture in this report was determined as follows:
Sh.’000’
Balance in the audited balance sheet 3,600
Add: Furniture purchased in the year 2000 1,000
4,600
Less: Accumulated depreciation on purchased furniture. 400
4,200
(g) INVENTORIES
The value of inventories appearing in this report was determined as follows:
Sh.’000’
Less: Overstatement on 31 March 2003 400
5,200
(h) QUOTED INVESTMENTS
Market value of quoted investments was Sh.6 million on 31 March 2003.
One-half of the quoted investments was sold in May 2003 and the proceeds used
to redeem the 8% debentures.
The quoted investments sold had generated the following income in the five years
2003 2002 2001 2000 1999

Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
(i) ORDINARY SHARES
The company has authorized and issued 800,000 ordinary shares of Sh.20 each.
In the year ended 31 March 2001, the company made a bonus of three ordinary
shares for every five held and financed by profits.
(j) PROFIT AND LOSS ACCOUNT
The profit and loss account balance in this report was determined as follows:
Sh.’000’
Add: Error due to expensing of furniture purchased in 2000 1,000
5,000
Less: Depreciation on furniture (400)
Overstatement of stock in 2003 (400)
4,200
(k) 8% DEBENTURES
The debentures were redeemed in May 2003 with proceeds from sale of one-half
of quoted investments.
(l) CAPITAL COMMITMENTS
The company had the following capital commitments on 31 March 2003:
Sh.’000’
Authorised and contracted 80,000
Authorised and not yet contracted 40,000
120,000
Yours faithfully
ABC AND ASSOCIATES

CERTIFIED PUBLIC ACCOUNTANTS

WORKINGS 2003 2002 2001 2000 1999

Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Turnover 37,600 31,000 29,000 24,500 20,000
Sales order - 2,000 (2,000) - -
37,600 33,000 27,000 24,500 20,000
Cost of sales 26,000 24,900 19,800 18,600 14,300

Furniture (1,000)
Understatement of stock 600 (600)
Overstatement of stock 400 - - - -
27,000 24,300 19,800 17,600 14,300
Administration costs 2,300 1,600 1,300 1,200 1,100
Depreciation on new
furniture 100 100 100 100 -
2,400 1,700 1,400 1,300 1,100
QUESTION FIVE
(a) (i) Funded scheme is a pension scheme in which the contributor (employer) has
transferred irrecoverably some assets to an entity (a fund) separate from the
employer’s enterprise, to meet future obligations for the payment of retirement
benefits.
(ii) Experience adjustments: Are alterations to retirement benefit costs arising from the
difference between previous actuarial assumptions as to the future events and what
actually occurred.
(b) (i) Yes, the current policy is not adequate as the directors can manipulate (increase
or decrease) profits may either decrease or increase pension contributions (therefore
pension costs reported) from period to period.
(ii) Reasons for variations in the pension regular costs
- Experience surpluses or deficiencies: the actual results and conditions may

differ significantly from what the actuary assumed they would be when he or
she worked out the regular costs or contribution rate.
- Changes in actuarial assumptions: In latter actuarial revaluations, the actuary

may use a different set of assumptions to determine the regular costs.
- Discretionary pension increases: the management may decide (at their

discretion) to increase (or decrease) the pension contributions.
- Changes in Actuarial Methods of Determining the regular cost e.g. from the
accrued benefits to prospective benefits method.
- Retroactive changes in benefits or conditions of membership: These may be

caused by management decisions or legal requirement changes.
(iii) Accrued benefits method: It assumes that the flow of new entrants to the scheme
will be such as to preserve the existing average age of the workforce.
Prospective benefits method: It only considers the existing workforce and seeks to
find a stable contribution rate for that group until the last member retires or leaves.
These two methods seek to determine the level of contribution rate required to fund
the estimated pension payments. Since the prospective benefits method takes into
account the ageing of the workforce, the fund size tends to be larger.
(iv) An accounting standard for pension costs would enable companies to recognize the
cost of providing pensions on a systematic and rational basis over the period in
which they benefit from the services of their employees. This would enable
company accounts to reflect a true and fair view with respect to pension costs.

JUNE 2004
QUESTION ONE
(a). Rose Kenya Limited and its subsidiary consolidated income statement for the year ended 30
September 2003
Ksh.million
Revenue 2,220
Gross profit 1,170
Expenses (470)
Finance cost (21)
Tax (212)
Profit after tax 467
Net profit 431
(b). Consolidated statement of changes in Equity for the year ended 30 September 2003
Retained earnings Proposed dividend

Sh.million Sh.million
At start of year 161 80
Net profit 422
Dividends
For 2002 paid (80)
Proposed final for year 2003 (100) 100
At end of year 483 100
(c). Rose Kenya Ltd & its subsidiary.

Consolidated balance sheet as at 30 September 2003
Ksh.million Ksh.million
Assets:
Non-current assets
Prepaid operating lease rentals 12
Goodwill 88
647
Current assets:
Inventories 226
Receivables and prepayments 495
Cash and bank balances 121
Total assets 1,489
Equity&liabilities
Capital & reserves
Share capital 100.0
Exchange reserve 101.2
Retained earnings 492.0
Proposed dividends 100.0
Shareholders’ funds 793.2
Minority interest 96.8
Deferred tax 140
Borrowings 220
360
1,250
Payables and accrued expenses 156
Current tax 68
Bank overdraft 15
239
Total Equity&liabilities 1,489
(11 marks)
(d). Goodwill treated as current asset
Goodwill at the moment of acquisition

= Ksh.60 million
= Ksh.60 million/Ksh.7.50 per Rand at 1 January 2003
= Rand 8 million.
At 30 September 2003, Goodwill = Ksh. (8 million x 11) = Ksh.88 million

Therefore Gain on Translation of Goodwill is (Kshs. 88 – Kshs. 60) = Kshs. 28
Increase in exchange reserve: Ksh. (88 – 60) million = Ksh.28 million

Workings:
RSAL: Income statement for the year ended 30 September 2003
Ksh. million (post acq)

Revenue 120 x 10 x 9/12 = 900
Cost of sales (60) x 10 x 9/12 = (450)
Gross profit 60 450
Expenses (24) x 10 x 9/12 = (180)
Op. Profit 36 270
Tax (12) x 10 x 9/12 = (90)
Profit after tax 24 180
Pre Post RKL (80%) 12

24 x 3/12 =6 24 x 9/12 = 18 x 10 = 180
Dividend paid 20 x 3/12 = (5) 20 x 9/12 = (15) x 11 = (165)
Retained Profit 4 x 3/12 = 1 4 x 9/12 =3 15 Min. Int(20%) 3

Ksh.million
PPE 11 x 11 = 121
Inventory 11 x 11 = 121
Receivables 33 x 11 = 363
Cash balances 11 x 11 = 121
Payables (5) x 11 = (55)
Tax (6) x 11 = (66)
55 605
SC 16 x 7.5 = 120
Profit and loss
B/f 24 x 7.5 = 180
Yr Pre acquisition 1 x 7.5 7.5
Post acquisition 15
Exch. Reserve 161.50
D. Tax 11 x 11 121
55 605
Cost of control account

RKL: Cost of investment 336 RSAL: Share capital 96
Profit and loss: b/f 144
Yr. Pre-acquisition 6
Profit and loss (W) 30
___ Goodwill C/d 60
336 336
Goodwill b/d 60
Exchange Reserve A/C

PKL: Exchange loss 70.00 Group share of exchange Reserve 129.20
161.5 x 80%
P & L – Pre Acq. Div 14.00
Bal c/d 101.20 Gain on Translation of Goodwill
28.00
171.20 171.20
Bal b/d 101.20
Minority Interest A/C

RSAL: Share Capital 24
120 x 20%
P&L 40.5
(180 + 7.5 + 15) x 20%
Bal c/d 96.8 Exchange Reserve 32.3
___ 161.5 x 20% ___
96.8 96.8
Bal b/d 96.8
Profit and loss (Workings)

CoC: Pre-acquisition RKL 454
Div: 5 x 80% x 7.5 30 RSAL (3) 12
Exch. Reserve Exchange loss
4 x 11 – 4 x 7.5 14 to exchange
Carried down 492 reserve 70
536 536
Brought down 492

QUESTION TWO
(a)
BZT LTD
TRADING PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31
DECEMBER 2003
(CURRENT PURCHASING POWER METHOD)
Sh. “million”
Sales 3,600 x 132 3,771
126
Opening stock 340 x 132

119.5 376
Purchases 2,780 x 132

126 2,912
3,288
Closing stock 420 x 132
131.5 (422)
Cost of sales 2,866
Gross profit 905
Gain on holding monetary items 15
920
Selling and distribution costs (225)
Administration cost (189)
Depreciation (224)
Debenture interest (36)
674
Profit on disposal of equipment 28
Tax 123
Dividends – paid 61
- proposed 40
101
Retained profit for the year 50
Retained profit brought forward (359 x 132) 395
120 _____
Retained profit carried forward 445
(b)
BZT LTD
BALANCE SHEET AS AT 31 DECEMBER 2003
(CPP – METHOD)
ASSETS Sh. ‘million’
Non Current Assets
Buildings 966
Machinery & equipment 200 x 132/110 _240
1,206
Current Assets
Stocks 422
Debtors 270
Bank and cash 210
_902
Total assets 2,108
Capital and reserves 767
Ordinary shares 371
Share premium _445
Debentures 300
Trade creditors 185
Proposed dividends __40
Workings
(a). CALCULATION OF CPP RETAINED PROFIT ON 31 DECEMBER 2002
BALANCE SHEET AS AT 31 DECEMBER 2002

HCA Ratio CPP
Sh.’millon’ Sh.’million’
Buildings 600 120/105 686
Machinery & equipment 350 120/110 382
Stock _340 120/119.5 _341
1,290 1,409
Ordinary shares 500 120/100 600
Share premium 200 120/100 240
Retained profit 380 Balancing 359
1,080 1,199
Net monetary liabilities
(Balancing) _210 _210
1,290 1,409

(b). DETERMINATION OF GAIN OR LOSS ON HOLDING MONETARY ITEMS
HCA Ratio CPP

Balance brought forward (210) 132/120 (231)
Sales 3,600 132/126 3,771
Purchases (2,780) 132/126 (2,912)
Selling and distribution (215) 132/126 (225)
Administration (180) 132/126 (189)
Debenture interest: June 30 (20) 132/126 (21)
December 31 (15) - (15)
Tax: June 30 (60) 132/126 (63)
December 31 (60) - (60)
Dividends: Paid (60) 132/129 (61)
Proposed (40) - (40)
Sale of equipment 145 132/129 148
Purchase of building (350) 132/123 (376)
Balance carried forward (245) (274)
Sale of shares – capital 100 132/123 107
- premium 100 132/123 107
Net monetary liabilities (45) (60)
Gain/(loss) on holding monetary items = (45) – (60)

Gain = Sh.15 million
TUTORIAL NOTE:
If the Sh. 200,000,000 received from sale of shares at a premium was converted as one
amount to CPP, then the CPP value would be Sh.214,600,000 and rounded to
Sh.215,000,000. The CPP net monetary liabilities would then be Sh.59,000,000 and this
would give a gain of sh.14,000,000. When a gain of Sh.14,000,000 is used, then there would
be a difference of Sh.1,000,000 in the CPP balance sheet and this would be adjusted to
retained profits.
You may therefore have a gain of Sh.14,000,000 and make adjustment in the retained profit
for the difference.
However, goodwill amortization is no longer applicable pursuant to IFRS 3.
(c). DETERMINATION OF THE CPP DEPRECIATION EXPENSE
HCA Ratio CPP

Depreciation
- Old building 100 132/105 126
- New building 35 132/122 38
- Machinery and 50 132/110 60
equipment 185 224
Assets value in Balance Sheet
Building: old 600 x 132 = 754
105
new 350 x 132 = 376
123 1,130 Less: depreciation (126 + 38) = 966
(d). DETERMINATION OF THE CPP VALUE OF ORDINARY SHARES
HCA Ratio CPP

Old shares 500 132/100 660
New shares 100 132/123 107
600 767
(e). DETERMINATION OF THE CPP VALUE OF SHARE PREMIUM
HCA Ratio CPP

Old shares 200 132/100 264
New shares 100 132/123 107
300 371
(f). DETERMINATION OF THE CPP PROFIT OR LOSS ON SALE OF

EQUIPMENT
Sh.’million’
Proceeds from sale of equipment 145
Less: CPP – Net book value on date of sale
100 x 129 117
110
Profit 28
Therefore CPP value of the profit on 31 December 2003 is determined as follows:

Profit = Sh.28,000,000 x 132
129
= Sh.29,000,000

QUESTION THREE
(a) Journal entries
Dr. “Sh” Cr. “Sh”

1. Equity share capital account 7,500,000
Capital reduction account 7,500,000
Being transfer of Sh.7.50 per share to
capital reduction account as per scheme of
reconstruction.
Bank account 2,000,000
. Equity share capital account 1,250,000
Share premium account 750,000
Being amount received from existing
shareholders for subscribing 500,000 new
equity shares @Sh.2.50 each at a premium
of Sh.1.50 per share.
2. 10% preference share capital 4,000,000
15% preference share capital 3,000,000
Equity share capital 1,000,000
Being conversion of 10% preference share
capital to 300,000 15% preference shares of
Sh.10 each and 400,000 equity shares of
Sh.2.50 each.
3. Interest payable on debentures 360,000
Equity share capital 250,000
Capital reduction account 110,000
Being share capital issued in lieu of interest
payable on debentures
12% debentures 3,000,000

Being conversion of 12% debentures to

14% debentures.
Bank account 900,000

Discount on issue of debentures 100,000
being issue of new debentures of 14% as
per scheme of reconstruction at a discount
of Sh.10 per debenture.
4. Loan from directors 1,000,000
Equity share capital 250,000
Share premium account 350,000
Being issue of share capital in
cancellation of loan from directors.
5 Bank account 3,000,000
Investment account 2,250,000
Amount realized from the sale of
investments.
6. Bank overdraft 1,500,000
Bank overdraft paid
7. Creditors account 1,590,000
Being amount paid to creditors
8. Capital reduction account 8,760,000
And
9 Goodwill 3,000,000
Patents and trademarks 250,000
Profit and loss account 2,900,000
Discount on issue of debentures 100,000
Land 800,000
Building 500,000
Machinery 400,000
Stock 400,000
Debtors 200,000
Capital reserve. 210,000
Being various fictitious, intangible and
Depreciation of other assets written off
(b) Matatizo Ltd

Balance Sheet (and reduced)
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Share capital Fixed assets
10,000,000 equity shares Land 3,200
of Sh.2.50 each 25,000 Building 2,500
Machinery 1,000 6,700
15% 500,000 preference 5,000
shares of Sh.10 each Current assets
issued, subscribed and
paid up. Stock 3,200
2,100,000 equity shares Debtors 1,800
of Sh.2.50 each fully 5,250 Cash in hand 50
called and paid up. Cash at bank 2,810 7,860
15% 300,000 preference 3,000 8,250
shares of Sh.10 each.
Reserves and surplus 210
Capital reserve 1,100 1,310
Share premium
Long term liabilities 4,000
14% debentures
Current liabilities: 1,000 _______
Creditors 14,560 14,560

Workings:
Cash at bank
Sh.’000’ Sh.’000’
Issue of equity 2,000 Creditors 1,590
share 3,000 Bank overdraft 1,500
Sale of investment 900 Balance 2,810
Issue of debentures 5,900 5,900
Capital reduction account

Sh.’000’ Sh.’000’
Goodwill 3,000 Equity share capital 7,500
Patents/trademarks 250 Interest on 110
Profit and loss account 2,900 debentures 400
Discount on issue of 100 Loan from directors
debentures 800 Bank account (sale of 750
Land 500 investment)
Building 400
Machinery 400
Stock 200
Debtors 210 _____
Capital reserve 8,760 8,760
(c) Distribution of anticipated profits

Sh.
Profits 2.500,000
Debenture interest (560,000)
1,940,000
Less: Preference dividend @ 15% (450,000)
Profit available for distribution to equity shareholders 1,490,000
QUESTION FOUR
(a). Principal short-comings of conventional accounting in relation to human resources:
(i). The amount spent on human resources is completely treated as an expense which is not
correct. The amount spent on acquisition, training and development with long-term
benefits should be capitalized.
(ii). Management needs data about the amount to be spent on acquisition of human
resources for purposes of planning and control in the same way they need data about
other resources. Such information is not available under conventional accounting.
(iii). The failure of conventional accounting to recognize the talents, capabilities and
potential of the human resources, resulted in high labour turnover, frustration and
despondency among the industrial workforce.
(iv). Management has absolutely no information regarding the total investment in human
resources
(b). (i). Earnings per share as at 31.12.2001 (Baraza Ltd.)
Number of shares:
In issue for full year 250,000,000
In issue for 1.1.2001 – 31.3.2001 = 50,000 x 3/12 x 75% 9,375,000
In issue 1.4.2001 – 31.12.2001 50,000 x 9/12 37,500,000
296,875,000
EPS = Sh.200,000,000 = 67.4 cents
296,875,000
(ii). EPS 31.12.2002 (Baraza Ltd.)
Theoretical ex-rights price
= (2 x 180) + (1 x 120) = Sh. 160
(2 + 1)
Number of shares before rights issue x Fraction x actual cum. Rights price
Of year Theoretical ex-right price
= 300,000,000 x 8/12 x 180 = 225,000,000

160
- Number of shares after rights issue x Fraction of year
450,000,000 x 4/12 = 150,000,000
Total shares (225,000 + 150,000) = 375,000,000
EPS = Sh.250,000,000 = 66.7 cents
375,000,000
Revised EPS calculated for 2001 (comparative)
2001 EPS x Theoretical ex-rights price = 67.46 x 160 = 59.9 cents
Actual cum right price 180
2002 2001
Therefore EPS 66.7 cents 59.9 cents
(iii) EPS 31.12.2003 (Kikundi Ltd)

Number of shares in issue at 31.12.2003 (450,000,000 x 2) = 900,000,000
Profit available Sh.450,000,000
EPS = 450,000,000 = 50 cents

900,000,000
Revised EPS for 2002 (comparative)
The EPS calculation for the previous period will have to reflect the effect of the share issue in
that period.
Number of shares in issue 1.1.02 – 31.8.02 225,000,000 x 2 = 450,000,000
1.9.02 – 31.12.02 150,000,000 x 2 = 300,000,000
750,000,000
Profit available Sh.250,000,000
Adjusted EPS = 250,000,000 33.3 cents

750,000,000
2003 2002
Therefore EPS 50 cents 33.3 cents
(ii). When there has been a rights issue at a discount to the market price during a financial year, the
earnings per share has to take into account the nature of rights issue. The rights issue is
equivalent to a bonus issue combined with an issue at full market price. Bonus shares are treated

as if they have been in issue for the whole year and are also taken into account in the previous
years EPS calculation to give a comparable report.
QUESTION FIVE
Tsavo group cash flow statement for the year ended 31.3.2004
Cash flow from operating activities Sh.’000’ Sh.’000’
Adjustment
Depreciation 7,535
59,869
Change in working capital
Increase in stocks (3,836)
Increase in debtors (3,562)
Increase in creditors 21,098
Cash from operations 73,569
Interest paid (5,480)
Tax paid (15,344)
Net cash received from operating activities 52,745
Cashflow from investing activities

Purchase of non-current assets (44,388)
Purchase of subsidiary company (71,240)
Dividends received from associate Company 15,070
Net cash used in investing activities (100,558)
Tsavo group cashflow statement for the year ended 31.7.2004

Sh.’000’ Sh.’000’
Cashflow from financing activities
Dividends paid (6,028)
Payment of loans (5,206)
Net cash used in financing activities (11,234)
Decrease in cash and cash equivalent (59,047)
Opening cash and cash equivalent (35,482)
Closing cash and cash equivalent (84,529)
Cash and cash equivalents b/f c/f

Sh.’000’ Sh.’000’
Cash in hand (7,398) 4,110
Bank overdraft (32,880) (88,639)
(25,482) (84,529)
3. Analysis of balances of cash and cash equivalents as shown in the balance sheet.
2004 2003 Change
Sh. ”000” Sh. ”000” Sh. ”000”
Cash 4,110 7,398 (3,288)
Overdraft (88,639) (32,880) (55,759)
(84,529) (25,482) (59,047)
4. Analysis of changes in financing during the year

Share capital Loan
(Including premium) Sh.’000’
Sh.’000’
Balance at 1 April 2003 457,991 62,609
Shares issued for non-cash
Consideration 32,195 -
Repayment of loan __-___ (5,206)
Balance at 31.03.04 490,186 57,403
5. Purchase of subsidiary undertakings

Sh.’000’
Net assets acquired:
Tangible Non-current assets 66,582
Stock 29,318
Debtors 17,810
Bank and cash balances 685
Creditors (14,248)
100,147
Goodwill 3,973
104,120
Satisfied by:
Shares allotted (235,000 x 137) 32,195
Cash (71,925)
104,120
6. Analysis of the net outflow of cash and cash equivalents in respect of the purchase of
subsidiary undertakings
Sh.’000’
Cash consideration 71,925
Bank and cash balances acquired (685)
71,240
7. Tax paid.
Sh.’000’
(i). Profit and loss charge
Charge for the year 18,769
Associated undertaking (6,713)
Deferred tax: Reduction in provision 6,713
Corporation tax charge 18,769
(ii) Creditors
Opening balance 19,180
Charge 18,769
Closing balance (22,605)
Tax paid 15,344

DECEMBER 2004
QUESTION ONE
(a) KT Ltd Group
Consolidated Income Statement
For period ended 31 Dec 2003
Sh. ‘M’ Sh. ‘M’
Revenue 11,500
Gross profit 2,750
Expenses (740 + 390) (1,130)
Profit share from Associate 440 x 40% 176
Loss on disposal of shares (213.06)
Profit before tax 1582.94
Taxation – Group (420 + 230) 650.0
- Associate 176 x 40% 70.4 (720.4)
Profit after tax 862.54
Minority Interest (63.84)
Net profit after tax and minority interest 798.7
Statement of changes in equity for period ended 31 December 2003

Ordinary Share Premium Retained Total
Share Capital Reserves
Bal b/fwd 10,000 4,000 4,686.40 18,686.40
Profit for the year - - 798.70 819.70
Dividend – paid - - (200) (200)
- Proposed - - (300) (300)
Bal c/d 10,000 4,000 4,985.1 19,006.1
(b) KT Ltd.
Sh. ‘M’
ASSETS
Non Current Assets
Property, plant & equipment (15,500 + 9,700) 25,200.00
Goodwill 1,400.00
Investment in associate 3,881.60
Current assets 7,180.00
Total assets 37,661.60
EQUITY & LIABILITIES
Ordinary shares 10,000.00
Share premium 4,000.00
Revenue reserves 4,985.10
18,985.10
Minority interest 3,480.50
Bank loans 11,000.00
Current liabilities 4,196.00
Total Equity& Liabilities 37,661.60
Workings:
1. DETERMINATION OF CONSOLIDATED SALES
Sh. ‘m’
Sales – KT Ltd. 7,200
- SB Ltd. 4,700
11,900
Less: Intragroup sales 400
11,500
2. CONSOLIDATED GROSS PROFIT
Sh. ‘m’
Gross profit – KT Ltd. 1,800
SB Ltd. 940
2,740
Add/(less):
Unrealized profit on opening stock 30
Unrealized profit on closing stock (20)
2,750
3. CONSOLIDATED COST OF SALES
Sh. ‘m’
Consolidated sales 11,500
Less: Consolidated gross profit 2,750
8,750
ALTERNATIVE METHOD
Sh. ‘m’
Cost of Sales - KT Ltd. 5,400
- SB Ltd. 3,760
9,160
Less: Intragroup cost of sales
(80 x Sh. 400m) (320)
100
Intragroup profit on goods purchased and resold in
the same period (year)
(20 x 75 x Sh. 400m) (60)
100 100
Unrealised profit on intragroup opening
Stock resold in the period (25 x Sh.120m) (30)
100 8,750

4. MINORITY INTEREST IN THE REPORTED PROFITS
Sh. ‘m’
Share of MI in the profits of SB Ltd.
10 x 9m x Sh.360 27
100 12m
30 x 3m x Sh.360 27
100 12m 54
Share of MI in the profits of AZ Ltd.
10 x 40 x Sh.9m x Sh. 264m 7.92

100 100 12m
30 x 40 x Sh.3m x Sh.264m 7.92

100 100 12m 69.84
Dividends received by SB Ltd.

From AZ Ltd. (3)
10 x 9m x Sh.40m
100 12m
30 x 3m x Sh.40m (3)
100 12m 63.84
5. PROFIT ON DISPOSAL OF SHARES

Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
Profit on disposal reported by KT Ltd. 110
Less:
Post-acquisition reserve brought
Forward and attributable to shares sold
- From SB Ltd.
1200m shares x 90 x (2,720 – 120 – 1,500) 220
5400m share 100
- From AZ Ltd.
1200m shares x 90 x 40 x (1,354 – 64 – 500) 63.2
5400m shares 100 100
Profit for the year attributable to shares sold
- From SB Ltd.
1200m shares x 90 x 9m (360 – 40) 48
5400m shares 100 12m
Sh.40m is dividends from AZ Ltd., which is included in Sh.264 of ________

AZ Ltd. 331.2
- From AZ Ltd.
1200m x 90 x 40 x 9m x Sh.264m 15.84
5400m 100 100 12m 347.04
Less:
Dividends received on the shares sold in the year up to date of
disposal
- from SB Ltd. (24) (323.06)
1200m x Sh.108m (213.06)
5400m
Loss on disposal
6. CONSOLIDATED RETAINED PROFITS BROUGHT FORWARD
Sh. ‘m’ Sh. ‘m’

Group retained profits brought forward by:
KT Ltd. Sh. (3,800 – 358) 3,442
SB Ltd. 90 x Sh. (2,720 – 120 – 1,500) 990
100
AZ Ltd. 90 x 40 x Sh. (1,354 – 64 – 500) 284.4
100 100 4,716.4
Unrealised profit on opening stock (30)

4,686.4
7. GOODWILL
Sh. ‘M’ Sh. ‘M’

Cost of Investment in SB Ltd:
- Cost of shares still held 8,400
- Cost of shares sold (2510 – 110) 2,400
Original cost of Investment 10,800
Less: Net assets acquired:
- Ordinary shares 6,000
- Share Premium 2,500
- Pre-acquisition reserves 1,500
Net assets of SB Ltd 10,000
Portion Acquired 90% x 10,000 9,000
Goodwill on Acquisition 1,800
Less: Portion of goodwill disposed
20%
- x 1800 (400)
90%
____
Goodwill after disposal
1,400
8. GOODWILL ON ACQUIRING SHARES IN AZ LTD.

Less: Net assets acquired:
Share capital 4,000
Share premium 2,500
Pre-acquisition reserves 500
7,000
Share of net assets (40% x Sh.7,000) 2,800
Goodwill 700
9. INVESTMENT IN ASSOCIATE, AZ LTD

Cost of Investment in AZ Ltd 3,500.0
Add: Group share of post acquisition
profits
Retained Profits c/d 1,354
Pre Acquisition profits (500)

Post Acquisition profits 854 x 40% = 341.6
Add: Group share of proposed dividends

100m x 40% 40.0
Investment in Associate 3,881.6
10. CURRENT ASSETS

Sh. ‘m’
Current assets – KT Ltd. 4,400
- SB Ltd. 2,800
7,200
Less: Unrealised profit on closing stock 20
7,180
11. MINORITY INTEREST FOR BALANCE SHEET

Sh. ‘m’
MI in SB Ltd. – 30 x Sh. (6,000 + 2,500 + 2,720) 3,366
100
Share of MI in:
Post acquisition reserve of AZ Ltd.
30 x 40 x Sh. (1,354 – 500) 102.48
100 100
Proposed dividends of AZ Ltd. 30 x 40 x Sh.100m 12__
100 100 3,480.48
12. CURRENT LIABILITIES

Sh. ‘m’
- KT Ltd 2,500
- SB Ltd 1,780
Less: Share of KT Ltd. in the proposed
dividend of SB Ltd. 70 x Sh. 120m 84
100 4,196
TUTORIAL NOTE
The Sh. 84m would be transferred from proposed dividends of SB Ltd. to consolidated reserves and
therefore would be excluded from current liabilities.
13. ALTERNATIVE METHOD OF DETERMINING CONSOLIDATED RESERVES

FOR THE BALANCE SHEET
Sh. ‘m’
Reserves from
- KT Ltd. 3,800
- SB Ltd. 70 x Sh. (2,720 – 1,500) 854
100
- AZ Ltd. 70 x 40 x Sh. (1,354 -500) 239.12
100 100
Group share of proposed dividends from:
- SB Ltd. 70 x Sh. 120 84
100
- AZ Ltd. 70 x 40 x Sh.100 28
100 100 5,005.12
Less: Unrealised profit on closing stock (20)

4,985.12
QUESTION TWO
(a) In IAS 17 context:
(i) Finance lease

This is a lease that transfers substantially all the risks and rewards incident to ownership
of an asset. Title may or may not eventually be transferred. (2 marks)
(ii) Guaranteed residual value is:
- In the case of the lessee, that part of the residual value which is guaranteed by the
lessee or by a party related to the lessee (the amount of the guarantee being the
maximum amount that could, in any event become payable).
- In the case of the lessor, that part of the residual value which is guaranteed by the
lessee or by a third party unrelated to the lessor who is financially capable of
discharging the obligations under the guarantee. (2 marks)
(iii) Contingent rent

This is that portion of the lease payments that is not fixed in amount but is based on a
factor other than just the passage of time (e.g. percentage of sales, amount of usage, price
indices, market rates of interest). (2 marks)
Alternatively: (Assuming interest quoted is paid).
(b) Using actual method.
Shs. ‘m’
Fair value of leased asset 16,320
Initial payment (2,550)
Balance 13,770

Remaining instalments over 7 months interest of 3.47 (6.94 x ½)
Year Bal b/f Interest Instalment Depr. Bal c/f

Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
2005 1 13,770 478 2,250 1772 11,998
2005 2 11,998 416 2,250 1834 10,164
2006 1 10,164 353 2,250 1897 8,267
2006 2 8,267 287 2,250 1963 6,304
2007 1 6,304 219 2,250 2031 4,273
2007 2 4,273 148 2,250 2102 2,171
2008 1 2,171 75 2,250 2175 (4)
Payable (instalment) = 13,770
1 – (1 + 0.0347)-7 = 2250
0.0347
Change to P & L AC.

Year Expenses Cost Depreciation Total
2005 894 4080 4974
2006 640 4080 4720
2007 367 4080 4447
2008 75 4080 4155
Balance Sheet Extract
Non – Current Assets

Cost 16,320 16,320
12,240 8,160
Obligations under finance lease
Non-current liability 6,304 2,177
Current liability 3,860 4,133
(6 marks)
(b) Silversands Manufacturing Company Ltd.
(i) Actuarial method

Sh. ‘000’
Fair value of leased asset 16,320
Initial payment 2,550
“Amount borrowed” 13,770
Instalment value 2,550
Number of instalments 7
Year Liabilities at Rental Sub-total Finance charge at 6.94% Liabilitity
beginning Payment at end
Sh. ‘000’ Shs. ‘000’ Sh. ‘000’ Sh. ‘000’ Shs. ‘000’
2005 16,320 2,550 13,770 955.57 14,725.57
14,725.57 2,550 12,175.57 845.07 13,020.64
2006 13,020.64 2,550 10,470.64 726.58 11,197.22
11,197.22 2,550 8,647.22 600.10 9,246.32
2007 9,247.32 2,550 6,697.32 464.95 7,162.27

7,162.27 2,550 4,612.27 320.11 4,932.38
2008 4,932.38 2,550 2,382.38 165.24 2,547.62
2,547.62 2,550 (2.38) 2.38 NIL
20,400 4,080
Fair value of leased asset = 16,320 gives Sh.4,080,000 depreciation P.A.

Estimated useful life 4
Charge to the profit and loss account
Year Finance charge Depreciation Total Charge against Timing Difference

Sh. ‘000’ taxable profits Sh. ‘000’
Sh. ‘000’ Sh. ‘000’
2005 1,800.64 4,080 5,880.64 5,100 780.64 O
2006 1,326.68 4,080 5,406.68 5,100 306.68 O
2007 785.06 4,080 4,865.06 5,100 (234.94) R
2008 167.62 4,080 4,247.62 5,100 (852.38) R
4,080__ 16,320 20,400 20,400 NIL
(ii) Extracts from published accounts
2005 2006
(b)(i) (b) (ii)
Sh. ‘000’ Shs. ‘000’
Provision for deferred tax 406.13 135.32
Operating profits stated after charging:
Depreciation on leased assets under finance leases 4,080 4,080
Interest payable on finance leases 1,800.64 589.9
Balance sheet
Deferred taxation account 406.13 589.90
Non-current assets
Cost 16,320 16,320
Depreciation to date 4,080 8,160
Net book value 12,240 8,160
Leasing Commitments
Minimum leasing commitments
2005 5,100 -
2006 5,100 5,100
2007 5,100 5,100
15,300 10,200
Less: Finance allocated to future periods 2,279.36 905.42
13,206.64 9,294.58
Current obligations under finance leases 3,603.32 4,371.55
* Non-current obligations under finance leases 9,417.32 4,922.52
* Contingent liability 2,279.36 905.42
Based on amount on premature cancellation of contract = Interest allocated to future periods or

otherwise specifically stated in terms of the lease.

QUESTION THREE
(a) DETERMINATION OF PURCHASE CONSIDERATION
SETTLED IN TOTAL
Ordinary Shares Loan Cash Amount
Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
Ordinary shareholders 720 720
Preference shareholders 640 640
Preference Dividend arrears 10 50 60
Debenture holders 400 400
Dissolution costs 30 30
1,770 50 30 1,850
REALISATION ACCOUNT
Sh. ‘m’ RTD Ltd. Sh. ‘m’
Land and buildings 820 Purchase consideration 1,850
Motor vehicles 680 Bank overdraft 30
Furniture 434 Trade creditors 150
Patents 185 Reconstruction A/C-loss 780
Stock 380
Debtors 280
Provision for dissolution costs 30
2,810 2,810
RECONSTRUCTION ACCOUNT
Goodwill 350 Share premium 400
Profit and loss account 850 Preference shares 360
Realisation a/c-loss 780 Ord. Shareholders
Pref. shareholders sundry Sundry members a/c 1,280
Members a/c – dividend arrears 60 (balance)
2,040 2,040
SUNDRY MEMBERS ACCOUNT

Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
Reconstruction A/c Preference Ordinary
- Adjustment 360 Preference shares a/c 1,000 2,000
Loss 1,280 Ordinary shares a/c
Balance c/d 700 720 Reconstruction a/c
Dividend arrears 60
1,060 2,000 1,060 2,000
The following balance sheet which is not part of the solution required is prepared to determine
whether the preceding workings have been done properly.
ZIMA LTD.
BALANCE SHEET (BEFORE SETTLEMENT OF PURCHASE CONSIDERATION)
Sh. ‘m’
ASSET
RTD Ltd. (As debtor for purchase consideration) 1,850
1,850
Ordinary shareholders sundry members A/c 720
Preference shareholders sundry members A/c 700
1,420
Sundry debenture holders 400
Provision for dissolution costs 30
1,850
(b) Recording settlement of purchase consideration

Dr. Ordinary Shares from RTD Ltd 1,770
Dr. Loan stock 50
Dr. Cash 30
Cr. RTD Ltd. 1,850
RECORDING SETTLEMENT OF DISSOLUTION COSTS AND AMOUNTS DUE TO

DEBENTURE HOLDERS AND SUNDRY MEMBERS
(i)
Shs. ‘m’ Shs. ‘m’
Dr. Provision for dissolution costs 30
Cr. Cash 30
To settle dissolution costs
(ii)
Dr. Sundry debenture holders A/c 400
Cr. Ordinary Shares 400
To settle debentures
(iii)
Dr. Preference shareholders
Sundry members A/c 700
Cr. Loan stock 50
Ordinary shares 650
To settle preference shareholders sundry members
(iv)
Dr. Ordinary shareholders
Sundry members A/c 720
Cr. Ordinary shares 720
To settle ordinary shareholders sundry members.

CONTINUATION OF SUNDRY MEMBERS A/C

PREF ORD. PREF. ORD.
Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
Loan stock 50 Bal b/d 700 720
Ordinary shares 650 720
700 720 700 720
BOOKS OF RTD LTD. JOURNAL ENTRIES

(i)
Land and building 620
Motor vehicles 550
Furniture 430
Patents 140
Stock 280
Debtors 250
Preliminary costs 30
Zima Ltd. 1,850
Creditors 150
Bank overdraft 30
Negative goodwill (balancing) 270
To record assets and liabilities, acquired from Zima Ltd.
(ii)
Dr. Zima Ltd. 1,850
Cr. Ordinary shares 1,770
6% loan stock 50
Bank A/c 30
To record settlement of purchase consideration
(iii)
Dr. Bank A/c 740
Cr. Ordinary share capital 740
To record cash received to make the shares fully paid.

Cash received as follows:
From previous:
Ordinary shareholders
3 shares x 200m shares x Sh.4 480
5 shares
Preference shareholders
4 x 100m shares x Sh.2 160
5
Debenture holders
25 shares Sh.400m x Sh.2 100
Sh. 200 740
(iv)
Dr. Stock A/c 60
Creditors 50
Cr. Bank 110
Purchase of stock and payment to creditors.

LEDGER ACCOUNTS TO HELP DETERMINE BALANCES TO APPEAR IN THE
BALANCE SHEET
BANK A/C
Ordinary shares 740 Zima Ltd (Bank o/d assumed) 30
Zima Ltd. (Amount paid for dissolution cost) 30
Stocks 60
Creditors 50
Bal c/d 570
_____ 740
740
CREDITORS A/C
Bank A/c 50 Zima Ltd. 150
Bal c/d 100 150
150
STOCK A/C
Zima Ltd. 280 Bal c/d 340
Bank A/c 60 __
340 340
ORDINARY SHARES A/C

Bal c/d 2,510 Zima Ltd. 1,770
2,510 Bank A/c 740
2,510 2,510

(c) RTD LTD.

BALANCE SHEET AS AT 1ST JULY 2004
RTD LTD.
BALANCE SHEET AS AT 1ST JULY 2004
ASSETS
Non – current assets:
Motor vehicles 550
Negative goodwill (270)
Patents 140
Furniture 430
1,470
Current assets:
Preliminary costs 30
Stock 340
Debtors 250
Banks 570
1,190
Total assets 2,660
EQUITY AND LIABILITY
Capital&reserves
Non current liability
Loan stock 50
Current Liability
Creditors 100
Total equity & liabilities 2,660
QUESTION FOUR
(a) Wateja Ltd.
Current cost income statement for the year ended 31 December 2003
Sh. ‘000’ Sh. ‘000’

Turnover 16,500
Historical cost profit before interest and tax 3,280
Current Cost operating adjustments
Cost of sales adjustment 203
Monetary working capital adjustment 78 (477)
Current cost operating profit 2,803
Interest payable 180 122
Current cost profit before tax 2,681
Taxation (1,200)
Current cost profit for the year 1,481
Dividends proposed (800)
Current cost retained profit for the year 681
Current cost retained profit b/f 4,780
Current cost retained profit c/f 5,461
(b) Wateja Ltd.

Current cost balance sheet as at 31 December 2003
Sh. 000’ Sh. 000’

ASSETS
Non Current Assets
Fixtures and fittings _2,765
25,065
Current Assets
Inventory 2,535
Accounts receivable 2,900
Cash 1,700 _7,135
Total assets 32,200
Capital & reserves
Shareholders fund 25,150
6% loan stock 3,000
Current liabilities
Accounts payable 2,050
Taxation 1,200
Dividends __800 _4,050
Workings
(i) Depreciation charge:
- Fixtures and fittings
Sh. ‘000’
Historical cost depreciation 10% x 3,000 300
Current cost depreciation 300 x 163 401
122
- Land and buildings
Sh. ‘000’
Historical cost depreciation 2% x 2,000
Current cost depreciation on 31.12.2002 40
Remaining years life 6,000
46
Current cost depreciation on 31.12.2003 130
Remaining years life 6,300
45
Current cost depreciation based on average 140
Values ½ (130 + 140) i.e.
Historical cost depreciation 135

Depreciation adjustment (40)

95
Summary: Fixtures and fittings 101
196
(ii) Cost of sales adjustments

HCA Adjustment Adjusted
Sh. ‘000’ Factor CCA Sh. ‘000’
Opening inventory 2,200 140/132 2,333
Closing inventory 2,500 140/144 2,430

____ ____
Increase 300 97
COSA = 300 -97 = 203,000
(iii) Monetary working capital adjustment
31.12.2003 31.12.2002
Sh. ‘000’ Sh. ‘000’
Accounts receivables 2,900 2,700
Accounts payables (2,050) (1,800)
Monetary working capital 850 900
HCA Adjustment CCA

Sh. ‘000’ Sh. ‘000’
Opening MWC 900 140 954
132
Closing MWC 850 140 826
144
Decrease in MWC (50) (128)
MWCA = (50) – (128) = (78,000)
(iv) Gearing adjustment
(DA + COSA + MWCA) x Average net borrowings________________________

Average net borrowings + Average shareholders funds
2003 2002
Sh. ‘000’ Sh. ‘000’
Net borrowings: Loan stock 3,000 3,000
Taxation 1,200 1,050
Cash (1,700) (160)
2,500 3,890
Shareholders funds 25,150 21,464
Average borrowings = (2,500 + 3,890) x ½ = Sh. 3,195,000
Average shareholders funds = (25,150 + 21,464) x ½ = Sh. 23,307,000
G.A = (196 + 203 + 78) x 3,195____

3,195 + 23,307
= Sh. 58,000
(v) Movement on current cost reserve

Sh. ‘000’
Balance as at 1.1.2003 14,684
MWCA 78
Increase in value of PPE 2,780
Inventory 205
17,689
QUESTION FIVE
(a) Circumstances that may indicate that an asset has been impaired:
i) There has been a significant decrease in the market value of the asset in excess of the
normal process of depreciation.
ii) There has been a significant adverse change in either the business or the market in
which the asset is involved.
iii) Evidence is available that indicates that the performance of the asset will be worse
than expected.
iv) Where an asset is valued in terms of value in use and the actual cash flows are less
than the estimated cash flows before discounting.
v) Market interest rates or other market rates of return on investment have increased
during the period and the increases are likely to decrease materially and asset’s
recoverable amount.
(b) Qualitative characteristics of financial statements:
Qualitative characteristics are the attributes that make the information provided in fianancial
statements more useful to users.The major qualitative characteristics are:
i) Understandability
An essential quality of the information provided in financial statements is that it’s readily
understandable by users. For this purpose, users are assume d to have reasonable
knowledge of business vand economic activities and accounting and a willingness to
study information with reasonable diligence.however, information should not be
excluded merely on the ground that its too difficult for certain users to understand.
ii) Relevance
To be useful, information must be relevant to the decision making needs of
users.Information has the quality of relebance when it influences the economic decisions
of users by helping them evaluate past, present or future events or confuirming, or
correcting, their past evaluations.
iii) Materiality
The relevance of information is affected by its nature and materiality. In some cases, the
nature of information alone is sufficient to determine its relevance. For example, the
reporting of a new segement may affect the assessment of the risks and opportunities
facing the entity irrespective of materiality of theresults achieved by the new segment in

the reporting period. Information is material if its omission or misstatement could

influence the economic decisions of users taken on the basis of the financial statements.
iv) Reliability
To be useful information has to be reliable. Information has the quality of reliability
when it is free from material error and bias and can be depended upon by users to
represent faithfully that which it either purports to represent or could reasonably be
expected to represent.
v) Comparability.
Users must be able to compare the financial statements of an entity through time in
order to uidentify trends in its financial position and performance. Users must also be
able to compare the financial statements of diffrenet entities in order to evaluarte their
relative financial position, performance and changes in financial position.
vi) Faithful representation

To be reliable, information must represent faithfully the transaction and other events it
either purports to represent or could reasonably be expected to represent. Thus, for
example, a balancesheet should represent faithfully the transactions and other events
that result in assets, liabilities and equity of the entity at the reporting date which meet
the recognition criteria.
Others include
vii) Substance over form
viii) Neutrality
ix) Completeness
(c)
Viwanda Ltd.
Segment report for year ended 31 March 2004
Food Plastics Pharmace Others Inter-segment Consolidated
Products and -uticals eliminations figures
Packaging
Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh. ‘m’
Revenues: 5,595 553 324 155 6,627
sales to unaffiliated
customers
Inter-segment sales 55 72 21 7 155 -
Total revenue 5,650 625 345 162 155 6,627
Segment expenses 3,335 425 222 200 122 4,060
Operating-profit 2,315 200 123 (38) 33 2,567
Other items” (562)
General corporate expenses
Income from investments 132
Interest expenses (65)
Income from continuing 2,072
operations
Identifiable assets 7,320 1,320 1,050 665 10,355
General corporate assets 722
Total assets 11,077
SUGGESTED SOLUTIONS
JUNE 2005 Time allowed: 3 hours
QUESTION ONE
(a) LEO LTD
Consolidated profit and loss a/c for year ended 30 April 2005
Sh. ‘M’
Sales [(2,680 + 1,160 + 750) – 500] 4,090
Cost of sales [balancing] 2,717
Gross profit [(808+350+225) + 6 – 10 – 6] 1,373
Operating expenses (618)
(365 + 135 + 98 + 20 dep. Adj]
Impairment of goodwill (78)
Share of associate’s
694
Taxation (185 + 75 + 37) (297)
Share of associate’s
30
Tax ( x 30) (9)
100
323
Balance b/f 323.0

Extra ordinary item 17.5
340.5
Dividends – paid (120)
- Proposed (80)
Retained profit for the year 140.5
Consolidated revenue
Reserves b/f 471
Revenue reserves c/f 611.5

Alternative Income Statement

Sales (2,650 + 1,160 + 750 – 500) 4,090
Cost of sales (1872 + 810 + 525 – 500 + 10 – 6 + 10) (2,731)
Other profit 1,359
Other incentive share PAT associate 13.5
Extra items 16
1,388.5
Operating expenses 598
Impairment of goodwill 88 (686)
702.5
Income tax expense (297)
405.5
Profit attributable to holding co. 340.5
Less Dividends: Interest paid 120
Fund proposed 80 (200)
Retained profit for the year b/f 471
611.5
(b) LEO LTD

Consolidated Balance Sheet as at 30 April 2005
ASSETS Sh. ‘M’

Investment in associate 241
Goodwill 156
Loan to associate 200
Current assets 1,524
7,911
Share premium 1,000
Revenue reserves 611.5
4,611.5
Loans 1,600
7,911
Workings
(a) Determination of good will and premium
(i) Goodwill on acquisition of Jana Ltd

Sh. Million
Less:
Net assets acquired
osc sp
75 x Sh. [1,000 + 500 +
40 Pre-acq. Reserve Revaluation
300 + 200 1,500
Goodwill 300
(ii) Share of goodwill in Wetu Ltd.
Sh. Million
Share of cost of investment
 75 
 100 xSh.1,000  750
 
Less: Share of net assets

 75 80 
 100 x 100 xSh.[600 + 300 + 200] 660
 
90
(iii) Premium on investment in Pokea Ltd
Sh. Million
Less: Dividends received and financed by
Pre-acquisition profits 6
Adjusted cost of investment 230
Less: Net assets acquired
 30 
 100 xSh.[400 + 100 + 100] 180
 
Premium 50

(b) Determination of consolidated revenue

Reserves brought forward
Sh. Million
Group share of revenue reserves b/f by:
Leo Ltd (680 – 6 – 122) 552
Jana Ltd
75 27
x [420 – 300 – 84]
100
Wetu Ltd
60 69
x [360 – 200 – 45]
100
Pokea Ltd.
30 43.5
x [280 – 100 – 35] 691.5
100
Less:
 75 10 
 100 x 100 xSh.200x2yrs
 
Impairment of goodwill 156
[116 + 40]
Impairment of premium 30
Group share of unrealized profit on
Opening stock
 75 
 100 xSh.6m  4.5
 
471
(c) Determination of minority interest in the consolidated profits of the year.
Minority interest in the profits of Jana Ltd. Sh. ‘M’
Share of MI in the profits 40

 25 
 100 xSh.160m 
 
Add/(less):
Share of MI in the unrealized profit on opening stock 1.5

 25 
 100 xSh.6m 
 
Share of MI in the unrealized profit on closing stock (2.5)

 25 
 100 xSh.10m 
 
Share of MI in depreciation adjustment
[25100 xSh.20m] (5)

34
Sh. ‘m’
Minority interest in the profits of Wetu Ltd.
Share of MI in the profits
 40  36
 xSh.90m 
 100 
Less: Share of MI in Jana Ltd in the dividends

Recorded by Jana Ltd from Wetu Ltd (5)
 25 80 
 x xSh.25m  31
 100 100 
Therefore total minority interest 65
(d) Determination of group share of

Associate’s profits before tax
Sh. Million
Share of associate’s profit before tax
 30  27
 xSh.90 
 100 
Less: impairment of premium
(10)
17
(e) Determination of consolidated extra ordinary items

Sh. ‘m’
Leo Ltd 28
 75  (12)
Jana Ltd  x16
 100 
 30  1.5
Pokea Ltd  x5
 100 
17.5
(f) Total property, plant and equipment
Sh. ‘M’
Leo Ltd. 2,850
Jana Ltd. 1,330
Wetu Ltd. 1,470
5,650
Add: Revaluation 200

5,850
Less: Depreciation adjustment 60

 10 
 xSh.200x3yrs  5,790
 100 

(g) Investment in associate to appear in

Sh. ‘M’
Group share of net assets excluding goodwill
x[(400 + 100 + 280) − 100]
30
100 204
Group share of goodwill 30

 30 
 100 xSh.100 
 
Premium on acquisition of shares 50

 30xSh.[400 + 100 + 100) 
(236 − 6) − 100 
 
Group share of proposed dividends 3

 30  __
 xSh.10m  287
 100 
Less: Total impairment of premium (40)
Unrealized profit on stock purchased from
Leo Ltd. (6)
241
(h) Goodwill to appear in consolidated balance sheet
Shs. ‘Million’
Goodwill in
Jana Ltd 300
Wetu Ltd 90
390
Less: impairment
Jana Ltd. (116 + 64) (180)
Wetu Ltd. (40 + 14) (54)
156
(i) Total current assets
Total current assets Shs. ‘m’

Leo Ltd. 844
Jana Ltd. 400
Wetu Ltd. 370
1,614
Less:
Unrealized profit on closing stock (10)
Intra group indebtedness (80)
1,524
(J) Minority interest to appear in the consolidated Balance sheet.
In Jana Ltd. Sh. ‘million’
 25 Osc sp p &l Re v

MI -  x[1000 + 500 + 420 + 200] 530
 100 
Add: Share of MI in Jana Ltd. in the
proposed dividends of Wetu Ltd. 4
25 80 ___
( x xsh.20m ) 534
100 100
Less: Share of MI in
Unrealized profit on stock
 25  (2.5)
 xSh.10m 
 100 
25
( xSh.20x3yrs ) (15)
100
516.5
In Wetu Ltd.
40
MI - [ x(600 + 300 + 360] 504
100
Total MI 1,020.5
Less: Share of MI in Jana Ltd. in the cost of
investment by Jana Ltd. in Wetu Ltd. 250
25
[ xSh.1000 ]
100
770.5
(k) Current Liabilities
Sh. ‘Million’
Current Liabilities
Leo Ltd. 450
Jana Ltd. 310
Wetu Ltd. 280
1,040
Less:
Intra-group indebtedness (80)
Share of Leo Ltd. in the proposed dividends of

 75 
Jana Ltd.  xSh.20  (15)
 100 
 60 
Wetu Ltd.  xSh.20  (12)
 100 
Share of MI in Jana Ltd. in the proposed
 25 80 
Dividend of Wetu Ltd.  x xSh.20  (4)
 100 100 
929

NOTE:
Share of Leo Ltd. in the proposed dividends would be posted to consolidated reserves while share of
MI in the dividends would be posted to MI account.
(l) Consolidated revenue reserves to appear in the balance sheet.
Sh ‘M’
Revenue reserves
Leo Ltd 680
Less: Dividends from Pokea Ltd. financed
By pre-acquisition profits 6
674
75
Jana Ltd. xSh.(420 − 300) 90
100
60
Wetu Ltd. xSh.(360 − 200) 96
100
30
Pokea Ltd. xsh.(280 − 100) 54
100
914
Add: Group share of proposed Dividends of:
75
Jana Ltd. ( xSh.20 ) 15
100
60
Wetu Ltd. ( xsh.20) 12
100
30
Pokea Ltd. ( xSh.10) 3
100
944
Less: impairment of goodwill and premium
- Jana Ltd. (180)
- Wetu Ltd. (54)
- Pokea Ltd. (40)
Depreciation adjustment (45)

 75 
 xSh.20x3years 
 100 
Unrealized profit on closing stock
- Sold by Leo Ltd. to Pokea Ltd. (6)
 75  (7.5)
- Sold by Jana Ltd. to Leo Ltd.  xSh.10 
 100 
611.5
NOTE
The above consolidated revenue reserve is the same as the consolidated retained profit carried
forward in the consolidated profit and loss account. (Total: 25 Marks)
QUESTION TWO
(a) Calculation of amount that would be received by the shareholders.
(i) Statement showing how proceeds from sale of assets would be distributed.
Proceeds from: Sh. ‘000’ Sh. ‘000’

Less: Bank overdraft 10,000
22,000
Fixtures and equipment 15,000
Stocks 12,500
Debtors 5,200
114,700
Less: Liquidation costs 5,000

109,700
Less: Debentures secured on floating charge 70,000

39,700
Less: creditors 14,500

Less: Preference dividend arrears 9,000
 10  16,200
 xsh.30mx3yrs 
 100 
Less: Payment to preference shareholders 16,200
NIL
(ii) Amount received by shareholders

Preference shareholders
- Dividend arrears 9,000
- Payment for capital 16,200
25,200
Ordinary shareholders would receive no payment as preference shareholders having priority

over them would not be fully paid due to insufficient proceeds from sale of assets.
Determination of income that would be earned:
(i) Calculation of the number of ordinary shares that would be issued on reconstruction of the
company.
Shares-issued to: No. of shares

‘000’
Debenture holders 5,000
(Shs. 50,000,000 ÷ Shs. 10)
Preference shareholders 1,200

[Shs. (30,000,000 ÷ Sh. 10) x 2:5]
Preference shareholders 450

 10 
 100 xSh.30,000,000x3yrsx5 ÷ 100
 
Ordinary shareholders 500
[(Shs. 50,000,000 ÷ sh. 10] ÷ 10)
No. of shares
Shares issued for cash to:
- Present preference shareholders 970
1
( x4,850,000)
5
- Present ordinary shareholders 3,880
4 12,000
( x4,850,000)
5
Summary of shares received
Debenture Preference Ordinary

Holders Shareholders shareholders
‘000’ ‘000’ ‘000’
Shares issued for capital 5,000 1,200 500
Shares issued in settlement of dividend arrears 450
Shares issued for cash ____ 970 3,880
5,000 2,620 4,380
(ii) Profit and loss account extract
Shs. ‘000’
Expected profit before interest and tax 9,100
Less: Debenture interest 1,600
 8 
 100 xSh.20,000,000
 
____
Tax (30%) 2,250
Dividends (80% of Shs. 5.25m) 4,200
Dividend per share

Sh.4,200,000
=
12,000,000shares
= Shs. 0.35
(6 marks)
(b) Shida Ltd

Balance sheet as at 2/10/2004
(After Reconstruction Scheme)
Shs. ‘000’ Shs. ‘000’

ASSETS
Non-Current assets
Furniture and equipment 15,000
107,000
Current assets
Stocks 24,500
Debtors 5,200
Bank 19,500 49,200
156,200
EQUITY AND LIABILITY
Capital reserves 4,700
124,700
8% Debentures 20,000
Current liability
Creditors 11,500
156,200

Workings
CAPITAL REDUCTION A/C

Shs. ‘000’ Shs. ‘000’
Goodwill 20,000 Land and buildings 12,000
Motor vehicles 5,000 Ordinary shares 50,000
Furniture and equipment 10,000 Preference shares 30,000
Stocks 5,500 Share premium 10,000
Debtors 1,300 Debentures 70,000
Reconstruction costs 4,000

Ordinary shares to:
- ordinary shareholders 5,000
- Preference shareholders 12,000
-Preference shareholders 4,500
- Debenture holders 50,000
8% debentures 20,000
Capital reserve (balancing) 4,700 ______
172,000 172,000
ORDINARY SHARES ACCOUNT

Shs. ‘000’ Shs. ‘000’
Capital reduction A/C 50,000 Balance b/d 50,000
Capital reduction A/C 71,500
Balance c/d 120,000 Bank A/c 48,500
170,000 170,000
BANK ACCOUNT
Shs. ‘000’ Shs. ‘000’
Ordinary shares A/C 48,500 Balance b/d 10,000
Reconstruction costs 4,000
Creditors A/c 3,000
Stock A/c 12,000
_____ Balance C/d 19,500
48,500 48,500
STOCK ACCOUNT
Shs. ‘000’ Shs. ‘000’
Balance b/d 18,000 Capital reduction A/c 5,500
Bank A/c 12,000 Balance c/d 24,500
30,000 30,000
CREDITORS A/C
Shs. ‘000’ Shs. ‘000’
Bank A/c 30,000 Balance b/d 14,500
Balance c/d 11,500 _____
14,500 14,500
(14 marks)
(Total: 20 Marks)
QUESTION THREE
XYZ Ltd.
Cash flow statement for the year ended 31.5.2005
Cash flow from operating activities Shs. ‘Million’ Shs. ‘Million’
Cash received from operations 713
Interest paid (66)
Tax paid (231)
Cash received from operating activities 416
Cash flows from Investing activities

Proceeds from sale of assets 25
Purchase of property plant and equipment (183)
Proceeds on sale of subsidiary (350 – 28) 322
Investment income (69 – 59) 10
Net cash received from investing activities 174

Finance lease repaid (66)
10% debentures repaid (200)
Dividends paid: Holding Co. (120+60) (180)
Increase in cash and cash equivalents 129
Cash and cash equivalents as at 31.5.2004 [59 - 123] (64)
Cash and cash equivalents as at 31.5.2005 [71 – 6] 65

WORKINGS
Accounts receivable Property, plant & equipment Ltd.

Shs. ‘m’ Shs. ‘m’ Shs. ‘m’ Shs. ‘m’
Balance b/d 479 Subsidiary 112 Balance b/d 520 Revaluation loss 20
Sales 5,145 Cashbook 5,158 C/Book 183 Subsidiary 132
___ Balance c/d 354 Finance lease 60 Disposal 13
5,624 5,624 Depreciation 52
(bal)
___ Bal c/d 546
Accounts payable/Expenses 763 763
Shs. ‘m’ Shs.
‘m’
Bal. b/d 84.2 Bal b/d 378 Tax paid
Subsidiary Cost of sales 3,430 Shs. ‘m’ Shs. ‘m’
(Creditors) 81 Operating exp. 1,065 Subsidiary Co. 4 Bal. b/d
PPE (depr) 52 Sub. 193 Cashbook 231 Current 9
(inventory) Bal. c/d CT 8 Deferred 96
Cashbook 4,445 Disposals 12 DT 64 P & L Account 202
(bal) 307 307
Bal c/d 281 Bal c/d 623
5,715 5,715
Cash proceeds on sale of subsidiary
Finance lease obligation Cash received (Bal. figure) 350
Shs. ‘m’ Shs. ‘m’ Less:
Cash book 66 Bal. b/d NCL 24 Net assets sold
Bal c/d NCL 26 CL 48 75x(132+193+112+28-81-4) 285
CL 40 PPE 60 Add unamortized goodwill
132 132  30 
 x1
 5  6 291
Profit on sale of subsidiary 59
Minority Interest
Subsidiary 95 Bal. b/d 260
Cashbook Dividend to MI 12
(Bal. figure) 15 Share of profit 26
Bal c/d 188 ___
298 298
(Total: 20 Marks)
QUESTION FOUR
(a) Net tangible asset valuation:
Shs. ‘000’ Shs. ‘000’
Land and building 610,000
Current assets (133,000 + 145,000 + 15,000) 293,000
1,293,000
Less: loan 150,000
Sundry creditors 135,000
Taxation 45,000 330,000
963,000
No. of shares = 20,000,000
963,000
Value per share = = Shs. 48.15
20,000
NB: The value of good will has not been reflected in this valuation. This method
should be used in conjunction with additional information as to dividend yield, earnings
etc. (4 marks)
(b) Dividend yield valuation:

Average dividend rate of the company = Shs. 30,000,000 x 100
Shs. 200,000,000
= 15%
17 + 16.7 + 17.0 50.7

Dividend rate in industry = = = 16.9
3 3
Value per share = Dividend % x paid up value = 15 x Sh.10

Normal market dividend yield 16.9
= Shs. 8.876
NB: It is assumed that the company will continue to pay dividend in comparable
amount with those of similar companies. This value would be unapplicable where
amalgamations or takeovers are contemplated. (4 marks)

(c) Price/Earnings valuation:

Average P/E ratio x EPS
Average yearly profits (These increase by 5% p.a.)
Shs. “000”
Year 1 85,000
2 89,250
3 93,713
4 98,398
5 103,318
469,679
469,679
Average per year = = 93.936
5
Average P/E ratio of Zeta Ltd. Beta Ltd. and Omega Ltd.
8.33 + 9.17 + 10.17 27.67

= = 9.22
3 3
93,936
EPS of Alpa Ltd = = 4.6968 = 4.7
20,000
Price = 4.7 x 9.22 = Shs. 43.33
(d) Capitalisation of earnings:

Earnings may be capitalized at normal rate of return to arrive at the valuation of equity
interest. When 17½% rate as given in the question is used, the valuation would be:
Earnings___________
Projected rate of return
93,936
= = 536,777
0.175
536,777
Value per share is = = Shs. 26.84
20,000
When the normal rate of return is taken as 12 ½%, the value would be as follows:
Valuation = maintainable rate of return x Sh. 10 = 17.5% x Sh. 10

Normal rate of return 12.5%
= Sh. 14
(4 marks)
(e) Super profits basis:

In this case, the earnings are not simply capitalized at a given rate. Here, the actual
profits are compared with the income which might be expected on that net tangible
assets of the company:
Shs. ‘000’
Net tangible assets (as in (a) above) 963,000
Normal profit on tangible assets at 12½% 120,375

Estimated profits 93,936
Deficiency 26,439
Deficiency in earning at capitalized value (26,439 ÷ 12.5%) 211,512
Net tangible assets 963,000

Less: deficiency 211,512
751,488
751,488
Value of one share = = Shs. 37.57
20,000
NB:
It is emphasized that in practice, no one factor would be used to value shares. The
varying factors would all be viewed and a composite value finally agreed upon. Even
then, it would be an estimate not an indisputable figure. (4 marks)
(Total: 20 Marks)
QUESTION FIVE
(a) Conceptual framework:
The framework sets out the concepts that underlie the preparation of financial
statements for external users.
The document covers the following:

(i) The objective(s) of financial statements, including details of the relevant user
groups, their information needs and the financial statements (and their
underlying assumptions) required to meet those needs.
(ii) The qualitative characteristics that make financial statements of value to users,
e.g. relevance, reliability e.t.c.
(iii) The elements of financial statements and how these elements interact to form a
basis on which financial statements could present information in a structured
manner, this includes definitions for assets, liabilities and equity interest.
(iv) The criteria that an item should attain if it is to be recognized and therefore
incorporated, in financial statements.
(v) Details of how elements of financial statements should be valued and
measured.
(vi) The discussion of the various possible concepts of capital and capital
maintenance.
Advantages of a conceptual framework of accounting principles

(i) It assists the IASB in the development of new accounting standards and in the
review of existing ones.
(ii) The IASB has a base when attempting to reduce the number of alternative
accounting treatments permitted by an accounting standard.
(iii) Prepares of financial statements have some guidance in dealing with topics and
transactions that do not form the subject of an accounting standard.

(iv) Assistance is given to auditors in forming an opinion on whether or not

financial statements comply with accounting standards.
(v) Users of financial statements may find it easier to interpret the information
contained in financial statements prepared in conformity with accounting
standards.
(vi) It provides those who are interested in the work of the IASB, with information
about its approach to the formulation of accounting standards.
(b) Information to be included in an entity’s environment report:
Environmental issues pertinent to the enterprise and industry

• The entity’s policy towards the environment and any improvement made since first
adopting the policy.
• Whether the entity has a formal system for managing environmental risks.
• The identity of the director(s) responsible for environmental issues.
• The entity’s perception of the risks to the environment from its operations.
• The extent to which the entity would be capable of responding to a major
environmental disaster and an estimate of the full economic consequences of such
as future major disaster.
• The effects of and the entity’s response to any governmental legislation on
environmental matters.
• Details of any significant infringement of environmental legislation or regulations.
• Material environmental legal issues in which the entity is involved.
• Details of any significant initiatives taken, if possible, linked to amounts in financial
statements.
• Details of key indicators (if any) used by the entity to measure environmental
performance. Actual performance should be compared with targets and with
performance in prior periods.
Financial information:
• The entity’s accounting policies relating to environmental costs, provisions and
contingencies.
• The amount charged to the income statement during the accounting period in
respect of expenditure to prevent or rectify damage to the environment caused by
the entity’s operations. This could be analyzed between expenditure that the entity
was legally obliged to incur and other expenditure.
• The amount charged to the income statement during the accounting period in
respect of expenditure to protect employees and society in general from the
consequences of damage to the environment caused by the entity’s operations.
• Details (including amounts) of any provisions or contingent liabilities relating to
environmental matters.
• The amount of environmental expenditure capitalized during the year.
• Details of fines, penalties and compensation paid during the accounting period in
respect of non-compliance with environmental regulations.
(c) “Corporate social reporting” is the process of communication the social and
environmental effects of organizations economic actions to particular interest groups
within society and to society at large. As such, it involves extending the accountability
of organizations (particularly companies) beyond the traditional role of providing a
financial account to the owners of capital, in particular shareholders. Such an extension
is predicated upon the assumption that companies do have wider responsibilities than
simply to make money for their shareholders.
Reasons why entities publish social reports

• They may have deliberately built their reputation on social responsibility in order to
attract a particular customer base.
• They may perceive themselves as being under particular pressure to prove that their
activities do not exploit society as a whole or certain sections of it.
• They may genuinely be convinced that it is in their long-term interests to balance
the needs of the various stakeholder groups.
• They may fear that the government will eventually require them to publish socially
oriented information if they do not do so voluntarily.
(Total: 15 marks)

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
DECEMBER 2005
QUESTION ONE
(a) Mzalendo and its subsidiary
Consolidated income statement for year to 31 October 2005
Kshs. Kshs.
‘million’ ‘million’
Revenue 65,425
Gross profit 10,055
Other incomes 56
10,111
Distribution costs 3,480
Administration expenses 2,200
Finance cost 280 (5,960)
Income tax expense (1,560)
Profit for the period 2,591
Profits attributable to: Holding company 1,977
2,591
Statement of changes in equity (extract)
Retained profits
Kshs. “million”
Balance as at 1 November 2004 1,153
Profit for the period 1,977
3,130
Dividends: Interim paid (300)
Final proposed (400)
Balance as at 31 October 2005 2,430
(b) Mzalendo Ltd.
Consolidated Balance Sheet as at 31 October 2005
Non-current assets Ksh. ‘million’ Ksh. ‘million

Current assets
Inventory 4,210
Accounts receivables 2,900
Total assets 12,500

Foreign exchange reserve 202
2,750
Minority interest (25% x 2,947) 737
3,487
12% loan stock 2,350
Current liabilities
Current tax 67
Dividends proposed 560 6,663
Workings
1. Translated income statement of subsidiary

Dime “million” Exchange Rate Ksh. “million”
Revenue 97,125 3.75 25,900
Cost of sales (77,550) 3.75 (20,680)
Other income 200 3.6 56
19,775 5,276
Distribution costs (3,150) 3.75 (840)
Administration (2,100) 3.75 (560)
Finance costs (600) 3.75 (160)
Profit before tax 13,925 3,716
Tax (4,725) 3.75 (1,260)
Profit after tax 9,200 2,456
Dividends: Interim paid (1,448) 3.92 (369)
Final proposed (2,304) 3.6 (640)
5,448 1,447

Translated balance sheet
Non-current assets Dime “million” Exchange Ksh. “million”

Rate
Property, plant and equipment 4,860 3.6 1,350
Current assets
Inventory 8,316 3.6 2,310
Receivables 4,572 3.6 1,270
Cash at bank 2,016 3.6 560
19,764 5,490
Share capital 1,348 4.4 306

Retained profits: Pre-acquisition 2,876 4.4 654
Post-acquisition 6,384 Bal. Fig 1,987
10,608 2,947
Loan stock 4,860 3.6 1,350
Current liabilities
Accounts payable 1,932 3.6 536
Current tax 60 3.6 17
Dividends 2,304 3.6 640
19,764 5,490
2. Workings for consolidated income statement
Revenue Cost of sales Distribution Administration Finance

Kshs. Kshs. Kshs. Kshs. Kshs.
Mzalendo 40,425 35,500 2,640 1,640 120
Mgeni (Translated) 25,900 20,680 840 560 160
Less: Inter Co. Sales (900) (900) - - -
Add unrealized profit - 90 - - -
Group 65,425 55,370 3,480 2,200 280
Profit attributable to minority interest:

25% x share of profit after tax in Mgeni = 25% x 2,456 = 614 million
3. Statement of changes in equity workings
Retained profits as at 1 November 2004
Ksh. ‘million’ Ksh. ‘million’

Retained profit b/f in Mzalendo (502 + 198) 700
Share in Mgeni
5,160 1,290
Opening net assets of Mgeni
4
Less: net assets on acquisition (306 + 654) (960)

330
Share of Mzalendo @ 75% 248
Add negative goodwill 205
1,153
Goodwill Kshs. “million” Kshs. “million

Investment in Mgeni 470
Less: ordinary share capital 306
Retained profits on acquisition 654
960
Share of Mzalendo at 75% (720)
Negative goodwill (250)
Note that it is an asset of subsidiary therefore it has to be restated at closing rate (3.6).
Goodwill at historical rate (4.4) (250)

3.6
Closing rate = (250) x = (205)
4.4
The difference between the two is exchange gain to foreign exchange reserve (250 – 205) = 45.
The remaining goodwill of 205 is credited to retained profits of subsidiary.
4. Balance sheet workings:
Group inventory Ksh. “million”

Mzalendo 1,990
Add Mgeni (translated) 2,310
4,300
Less unrealized profit (90)
4,210

Foreign exchange reserve Ksh. ‘million’

Net closing assets of Mgeni (translated B/sheet) 2,947
5,160 (1,290)
Net opening assets
4
Increase in net assets 1,657
Less increase due to profits (translated P & L) (1,447)
Foreign exchange gain 210
Share of Mzalendo Ltd. 75% 157
Add Gain on retranslating goodwill to closing rate 45
202
Minority interest in balance sheet
Net assets in subsidiary’s translated balance sheet 2,947
Share of minority interest @ 25% 737
QUESTION TWO
(a) Biashara Ltd.
Profit and loss account for year ended 31 December 2004

Shs. ‘000’ Shs. ‘000’
Turnover 33,800
Operating profit before interest and tax 3,130

Current cost operating adjustments 1,200
1,930
Gearing adjustment 200
Interest payable (250)
(50)
Current cost profit before tax 1,880
Tax 870
1,010
Dividends paid
- preference 100
- ordinary 200
Dividends proposed
- Preference 100
- Ordinary 300
700
Current cost retained profit for the year 310
(b) Biashara Ltd.

Current cost balance sheet as at 31 December 2004
ASSETS Sh. ‘000’ Sh. ‘000’
Non-current assets
Land 2,750
Buildings 6,600
12,320
Current assets
Stock 568
Debtors 750
Bank 5,590
6,908
19,228
Share premium 1,500
15,928
Loan 2,000
Current liabilities
Creditors 560
Current tax 240
Proposed dividend 400
1,300
19,228
Workings
Computation of current cost operating adjustments
(a) On stocks
(i)
Cost of sales HCA Ratio CCA
Adjustment Sh. ‘000’ Sh. ‘000’
Opening stock 600 132 660
120
Closing stock 560 132 528
___ ___
140
Decrease in stock (40) (132)
COSA = (40) – (132)

= Sh. 92,000

(ii)
Revaluation surplus on 31 HCA Ratio CCA Rev. Surplus
Dec. 2003
Stock 600 122 610 10
120
On 31 Dec. 2004
Stock 560 142 568 8
140
(b) (iii) On monetary working capital

Monetary working capital adjustment
HCA RATIO CCA

Sh. ‘000’ Sh. ‘000’
Opening – MWC
Debtors 860
Bank 150
Creditors (380) 132
(a) 630 693
120
Closing – MWC
Debtors 750
Bank 5,590
Creditors (560) 132
(b) 5,780 5,450
140
Increase in
MWC (b) – (a) 5,150 4,757
MWCA = 5,150 – 4,757

= Shs. 393,000
(c) On fixed assets

(iv) Depreciation adjustment
HCA RATIO CCA DEP. ADJ.

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Depreciation
- Buildings 500 120 600 100
100
- Motor vehicles 1,080 110 1,485 405
80
1,580 2,085 505
Depreciation expense is determined as follows:
5
Buildings = x Sh. 10,000,000
100
= Sh. 500,000
20
Motor vehicles = x Sh. (6.4 – 1.0)m
100
20
= x Sh. 5,400,000
100
= Sh. 1,080,000
(v) Revaluation surplus
On buildings HCA Ratio CCA Rev. Surplus

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
On 31 Dec. 2003
Buildings – cost 10,000 110 11,000
100
Accum. Dep. (4,000) 110 4,400
100
6,000 6,600 600
On 31 Dec. 2004
Buildings – cost 10,000 120 12,000
100
Accum. Dep. 4,500 120 5,400
100
5,500 6,600 1,100

On motor vehicles still held

On 31 December 2003 HCA RATIO CCA REV. SURPLUS
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Vehicles –cost 5,400 100 6,750
80
Accum. Dep. 2,160 100 2,700
80
3,240 4,050 810
HCA RATIO CCA REV. SURPLUS

On 31 Dec. 2004 Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Vehicles – cost 5,400 110 7,425
80
Accum. Dep. 3,240 110 4,455
80
2,160 2,970 810
Motor vehicle sold
On 31 December 2003
Vehicle – cost 1,000 100 1,250

80
Accum. Dep. 400 100 500
80
600 750 150
On 30 Sep. 2004
Vehicle - cost 1,000 100 1,350
80
Accum. Dep. 400 100 540
80
600 810 210
(vi) Computation of prior years backlog depreciation adjustment
Sh. ‘000’ Sh. ‘000’

CCA – accumulated depreciation c/f 31.12.04 9,855
(Sh. 5,400 + Sh. 4,455)
Less:
CCA – accum. Depreciation b/f 7,100
(Sh. 4,400 + Sh. 2,700)
HCA depreciation expense 1,580
Depreciation adjustment (Sh. 100 + Sh. 405) 505
9,185
670
(vii) Computation of adjustment on profit on disposal of motor vehicle
Sh. ‘000’
Proceeds from disposal of motor vehicle 650
(Sh. 600,000 + Sh. 50,000)
Less: CCA – net book value on date of disposal 810

CCA – Loss on disposal 160
Sh. ‘000’
CCA loss on disposal 160
Less: HCA profit on disposal 50

Adjustment 210
(d) Computation of gearing adjustment
(i) Preparation of current cost reserve account to determine the balance to be used
in the computation of gearing adjustment
Current cost reserve account

Sh. ‘000’ Sh. ‘000’
Revaluation surplus Balance b/d 1,250
- Stock (8 – 10) 2 Revaluation surplus
- Land 250
- Building (1,100 – 600) 500
Balance c/d 2,058 - Motor vehicle sold (210 – 150) 60
2,060 2,060
(ii) Determination of average shareholders funds and average borrowings:
Shareholders funds
31.12.2003 31.12.2004
Sh. ‘000’ Sh. ‘000’

Preference share capital 2,000 2,000
Retained profit 2,270 3,580
Proposed dividends 300 400
11,820 16,538
Average shareholders funds = ½ x Sh. (11,820 + 16,538)

= Sh. 14,179

Borrowings
31.12.2003 31.12.2004
Sh. ‘000’ Sh. ‘000’
Loan 3,000 2,000
Current tax 170 240
Interest payable 150 100
3,320 2,340
Average borrowings
Sh.3,320 + Sh.2,340
=
2
= Sh. 2,830,000
(iii) Calculation of gearing percentage and gearing adjustment.
Gearing percentage
= Average borrowings_____________
Average borrowings + average shareholders funds
Sh.2,830
= x100
Sh.2,830 + Sh.14,179
= 16.64%
Gearing adjustment
= Gearing percentage x Current cost operating adjustments

16.64
= xSh.(92 + 393 + 505 + 210)
100
16.64
= xSh.1,200
100
= Shs. 200
(iv) Preparation of current cost reserve account to determine the balance to appear in the
CCA balance sheet.
Current cost reserve account

Sh. ‘000’ Sh. ‘000’
Revaluation surplus Balance b/d 1,250
- Stock (8-10) 2
Revaluation surplus
Backlog depreciation - Land
Adjustment 670 - Buildings (12,000 – 11,000)
- Motor vehicle sold (210 – 150)
- Gearing adjustment 200 Profit and loss account
- COSA 92
Balance c/d 2,848 - MWCA 393
3,720 3,720
QUESTION THREE
ACCOUNTANTS’ REPORT
The Directors
Delta Ltd.
P.O. Box
NAIROBI
18 October 2005
Gentlemen,
1. We have examined the audited financial statements of Delta Ltd. (The company) for the
five financial years ended 30 June 2005.
2. We are the auditors of the company and have acted as auditors of the company for the three
years ended 30 June 2005. Prior to our appointment, Mkaguzi and Associates were the
auditors of the company.
3. No audited financial statements for submission to the members of the company have been
prepared in respect of any period subsequent to 30 June 2005.
4. The information set out in paragraphs 7 to 10 is based on the audited financial statements of
the company after making all the adjustments we consider appropriate for the inclusion of
our report in the prospectus.
5. The audited financial statements have been prepared on the basis of the accounting policies
set out in paragraph 7.
For all the accounting periods dealt with in this report, the audited financial statements have
been prepared in accordance with International Accounting Standards issued by the
International Accounting Standards Committee.
6. In our opinion, the information set out in paragraphs 8 to 10 gives for the purpose of the
prospectus, a true and fair view of the profit of the company for the period 1 July 2000 to
30 June 2005 and the state of affairs of the company as at 30 June 2005.
7. ACCOUNTING POLICIES
The significant accounting policies that have been adopted in arriving at the financial
information set out in this report are as follows:
(i) BASIS OF ACCOUNTING

The company prepares its financial statements on the historical cost basis of accounting
modified to include the revaluation of certain assets.

(ii) TURNOVER
Turnover represents net aggregate amount receivable for goods supplied and
services rendered net of value added tax.
(iii) TAXATION
The company uses deferred taxation method to account for its tax expense.
(iv) NON-CURRENT ASSETS

Non-current assets are stated at cost or valuation less depreciation.
(v) DEPRECIATION
No depreciation is provided on freehold property.
Depreciation is provided on other non-current assets on a straight line basis on

cost at the following rates per annum:
Plant and machinery 5%

Motor vehicles 10%
Furniture 12.5%
(vi) STOCKS
Stocks are stated at the lower of cost and net realizable value.
(vii) DEBTORS
Debtors are stated net or provision for doubtful debts.
(viii) QUOTED INVESTMENTS

Quoted investments are stated at market price.
8. PROFIT AND LOSS ACCOUNTS

The profit and loss account for each of the five years ended 30 June 2005 after making
necessary adjustments to the audited accounts are set out below:
Notes 2001 2002 2003 2004 2005

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Turnover 10(a) 9,650 10,700 12,400 15,600 17,518
Cost of sales 7,720 8,560 9,920 12,630 13,670
Gross profit 1,930 2,140 2,480 2,970 3,848
Administration costs 480 520 550 580 620
Selling and
distribution costs 298 390 410 420 460
778 910 960 1,000 1,080
Finance costs (180) (180) (240) (300) (300)
Profit before tax 992 1,080 1,320 1,710 2,528
Tax 302 330 400 530 650
Profit after tax 690 750 920 1,180 1,878
Dividends 10(b) 400 480 540 800 800
Retained profit 290 270 380 380 1,078
Earnings per share 10 (c) Sh. 0.86 Sh. 0.94 Sh. 1.02 Sh. 1.18 Sh. 1.88
9. BALANCE SHEET
The balance sheet of the company as at 30 June after making necessary adjustments to the
audited balance sheet is set out below:
ASSETS Notes Sh. ‘000’ Sh. ‘000’

Non-current assets
Freehold property 10 (d) 12,000
Motor vehicles 10 (e) 4,900
Furniture 1,500
24,400
Current assets
Stock 10 (f) 2,980
Debtors 10 (g) 1,618
Quoted investments 10 (h) 650
Bank and cash 150
5,398
29,798

Share capital 10 (i) 10,000
Share premium 4,000
Revaluation reserve 2,000
Investment price
Fluctuation reserve 10 (j) 190
Profit and loss account 10 (k) 4,148
20,338
Debentures 5,000
Bank loan 10 (l) 850
Deferred tax 1,950
7,800
Current liabilities
Trade creditors 710
Current tax 550
1,660
29,798
10. NOTES TO THE FINANCIAL STATEMENTS

(a) TURNOVER
Turnover is composed of both domestic and export sales as shown below:

2001 2002 2003 2004 2005

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Domestic Sales 5,850 6,200 7,200 9,200 10,318
Export Sales 3,800 4,500 5,200 6,400 7,200

9,650 10,700 12,400 15,600 17,518
(b) DIVIDENDS
Dividends were paid at the following rates on ordinary shares of Sh. 10 each.
2001 2002 2003 2004 2005

Dividend Rate 5% 6% 6% 8% 8%
(c) EARNINGS PER SHARE

Earnings per share for each of the five years ended 30 June 2005 were computed based
on reported net profit after tax and on weighted average number of ordinary shares
outstanding in the year which were as shown below:
2001 2002 2003 2004 2005

‘000’ ‘000’ ‘000’ ‘000’ ‘000’
Number of Ordinary shares 800 800 900 1,000 1,000
(d) FREEHOLD PROPERTY

The market value of the freehold property was Sh. 13.5 million on 30 June 2005.
(e) MOTOR VEHICLES

The value of motor vehicles appearing in this report was determined as follows:
Sh. ‘000’
Balance in the audited balance sheet as at 30 June 2005 4,800
Add: Depreciation on motor vehicle put out of use 100
4,900
(f) STOCKS
The value of stocks appearing in this report was determined as follows:
Sh. ‘000’
Add: understatement of stock on 30 June 2005 180
2,980
(g) DEBTORS
The value of debtors appearing in this report was determined as follows:
Sh. ‘000’
Add: Error in sales invoice 18
1,618
(h) QUOTED INVESTMENTS

The quoted investments were sold in August 2005 and the proceeds used to repay the
bank loan.
Investment income reported in each of the five years ended 30 June 2005 was generated
by the quoted investments.
(i) SHARE CAPITAL

The company has an authorized share capital, of Sh. 20 million all composed of
ordinary shares of Sh. 10 each. All the issued and outstanding ordinary shares are fully
paid.
(j) INVESTMENT PRICE FLUCTUATION RESERVE

The balance in the reserve account has been realized following the sale of the quoted
investments.
(k) PROFIT AND LOSS ACCOUNT

The balance in the profit and loss account in this report was determined as follows:
Shs. ‘000’
Add: Effect of overprovision for depreciation 100

Error in sales invoice 18
Effect of understatement of stock 180
4,148
(l) BANK LOAN

The bank loan was repaid in August using proceeds from sale of quoted investments.
(m) CAPITAL COMMITMENTS

The company has the following capital commitments on 30 June 2005.
Sh. ‘000’
Authorized and contracted for 6,000
Authorized and uncontracted for 2,000
8,000
Yours faithfully
MHASIBU AND ASSOCIATES

CERTIFIED PUBLIC ACCOUNTANTS OF KENYA

Workings:
2001 2002 2003 2004 2005

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
1. Adjusted turnover
Turnover 9,650 10,700 12,700 15,300 17,500

Sales order (300) 300
Technical error ____ ____ ____ ____ 18
9,650 10,700 12,400 15,600 17,518
2. Adjusted cost of sales
Cost of sales 7,720 8,560 10,160 12,240 14,000

Sales order (240) 240
Overstatement of stock 150 (150)
Understatement of stock ____ ____ ____ ____ _(180)
7,720 8,560 9,920 12,630 13,670
3. Adjusted selling and distribution
costs
Selling and distribution 298 390 410 470 510

Less: Depreciation on motor
vehicle (50) (50)
398 390 410 420 460
QUESTION FOUR
Leta Ltd.
Consolidated cash flow statement for year ended 31 October 2005
Cash flows from operating activities Sh. ‘million’ Sh. ‘million

Adjustments
Share of profit after tax in associate company (40)
Investment income (50)
Finance cost 150
Depreciation charge 100
Loss on sale of property, plant and equipment 26
Profit on sale of investments, (10)
816
Changes in working capital
Increase in inventory (16)
Increase in receivables (90)
Decrease in payables (24)
Cash from operations 686
Interest paid (150)
Tax paid (270)
Net cash received from operations 266
Cash flows from investing activities

Purchase of PPE (200)
Dividends from associate (100+40-130) 10
Proceeds on sale of investments 60
Proceeds on sale of PPE 64
Purchase of subsidiary (70 + 20) (90)
Purchase of intangible assets (90)

Issue of shares 100
Long-term loan (100 + 50 – 340) 190
Dividends: Holding company (222)
Minority interest (60 + 30 + 20 – 100) (10)
Net increase in cash and cash equivalents 128
Cash and cash equivalents b/f (194)
Cash and cash equivalents c/f (66)
Cash and cash equivalents b/f c/f
Shs. ‘million’ Shs. ‘million’

Cash 2 4
Bank (196) (170)
Short-term investments - 100
(194) (66)
Workings (Figures in millions)
Depreciation A/C
Shs. ‘000’ Shs. ‘000’
Disposal 80 Balance b/d 580
Subsidiary 80
Balance c/d 680 P & L (Bal. figure) 100
760 760
Inventory A/C
Shs. ‘000’ Shs. ‘000’
Balance b/d 204
Subsidiary 80
300 300
Receivables A/C
Balance b/d 630
Subsidiary 60
780 780

Payables
Shs. ‘000’ Shs. ‘000’
Decrease 24 Balance b/d 398
Balance c/d 454
__ Subsidiary _80
478 478
PPE (cost)
Sh. m. Sh. m.
Balance b/d 1,190 Disposal 170
Subsidiary 200
Revaluation 20
Purchase (bal. fig) 200 Bal. c/d 1,440
1,610 1,610
Tax A/C
Sh. m. Sh. m.
Cash book 270 Balance b/d 220
Balance c/d 240 Subsidiary 10
___ P & L 280
510 510
Intangibles A/C
Sh. m Sh. m.
Balance b/d 400
G/will
90 – (80% x 100) 10
Purchase 90 Bal. c/d 500
500 500
Dividend Minority Interest A/C

Sh. m. Sh. m.
Dividend to MI 10 Balance b/d 60
Balance c/d 100 Share of profit 30
Net subsidiary 20
__ (20% x 100) ___
110 110
Dividends to holding company

Sh. m.
Retained profits b/f 240
For the year 330
Transfer from revaluation reserve 2
572
Less balance c/d (350)
Dividend paid 222
Revaluation reserve
Sh. m Sh. m
To retained profit 2 Balance b/d 182
Balance c/d 200 PPE 20
202 202
Long term loans

Shs. m. Shs. m.
Balance b/d 100
Subsidiary 50
Balance c/d 340 New loan 190
340 340
Cash proceeds from issue of shares

Sh. m
Increase in share capital (400 – 300) 100
Increase in share premium (320 – 300) 20
120
Less: purchase of subsidiary (20)
100
QUESTION FIVE
(a) Merits of the Value Added Statement include:
- It is an effective tool of predicting managerial efficiency.

- It enables negotiators assess a company’s ability to pay wages and salaries in case of
industrial disputes.
- It is an effective tool of evaluating the rewards to stakeholders of the company
relative to each other.
- It helps to determine a company’s social responsibility in terms of distribution of
the rewards.
(b) Ujuzi Ltd.

Value Added Statement for the year ended 30 June 2005

VIEW (i) Sh. ‘000’

Turnover 25,160
Cost of sales (10,200 + 2,040) (12,240)
Value added 12,920
To employees:
Salaries and wages (6,800)
To Government:
Taxation (2,040)
To Financiers:
Dividends and interest (816 + 680) (1,496)
To firm
Depreciation and retained profits (2,584)
Ujuzi Ltd. Value Added Statement for the year ended 30 June 2005
VIEW (ii) Sh. ‘000’
Turnover 25,160
Cost of sales (10,200 + 1,360 + 2,040) (13,600)
Value Added 11,560
To employees:
Salaries and wages (6,800)
To government:
Taxation (2,040)
To Financiers:
Dividends and interest (816 + 680) (1,496)
To firm:
Retained profits (1,224)
(c) Segmental report – it involves preparing supplementary information to the financial

statements for each distinguishable component of an enterprise that is subject to risks
and returns different from those other segments.
JUNE 2006 SUGGESTED SOLUTIONS
QUESTION ONE
(a) Hope Ltd.

Consolidated income statement for year ended 31 March 2006
Continuing Discontinued Enterprise

as
Operations operations a whole
Sh. ‘M’ Sh. ‘M’ Sh. ‘M’
Revenue 1850 250 2100
Cost of sales (741) (50) (791)
Gross profit 1109 200 1309
Expenses
Administration expenses (350) (55) (405)
Distribution cost (150) (20) (170)
Other expenses (loss on sale of Old Ltd.) - (70) (70)
Finance costs (50) (10) (60)
Income tax expense (190) (25) (215)
Profit for the period 369 20 389
Profit attributed: Holding company 358.75
389.0
(b)Consolidated statement of changes in equity (extract)

Retained profits
Sh. ‘M’
Balance as at 1 April 2005 1,153
Add: Profit for the period 358.75
1,511.75
Less: Dividends paid (300)
Balance as at 31 March 2006 1,211.75
(c) Hope Ltd.

Consolidated balance sheet as at 31 March 2006
Non current assets:
Sh. M Sh. M
Property, Plant & Equipment 4,409
Goodwill 35
4,444
Current assets:
Inventory 1,060
Receivables 750
Total assets 6,604

Financed by:
Retained profits 1,211.75
4,211.75
4,664
Non current liabilities:
10% loan stock 700
Deferred tax 280 980
Trade payables 780
Accruals 60
Current tax 120 960
Workings
(1) Profit and loss: ( income statement)
(a) Continuing operation

Sales Cost of Administration Distribution Finance Income
sales expenses cost costs tax
Sh. M Sh. M Sh. M Sh. M Sh. M Sh. M
Hope Ltd. 1600 700 250 100 40 150
New Ltd (6/12) 500 200 100 50 20 40
Inter Co. sales: to Old Ltd. (50) - - - - -
: To new Ltd (200) (200) - - - -
Unrealized profit (Only new - 40 - - - -
Depreciation of fair value - 1 - - - -
Adjustments (6 months)
Inter Co. interests (1/4x 40) - - - - (10) -
1850 741 350 150 50 190
Discontinued operations old
Ltd. (6/12) 250 100 55 20 10 25
Inter Co. sales (From Hope - (50) - - - -
250 50 55 20 10 25
(b) (i) (ii) Minority interests

Profit / loss of old Ltd. (Profit due to)
Sh. M Sh. M Old Ltd. New
Ltd.
Other incomes 275 Sh. M Sh. M
Less: dividends from New Ltd. (75) PAT 80 180
Profit as per Hope Ltd. 200 For half year 40 90
Less: Post acquisition Dep. On fair value - (1)
Profits sold Adjusted PAT 40 89
80% x 40 (650 - 20 – 300) 264 Share at 20% 26%
Dividends foregone Sh. 8m Sh.22.25
80% x 40 x 6/12 16 (280) Total due to MI Sh. M
(80) Old Ltd. 8
Add: goodwill impaired 10 New Ltd 22.25
Loss on sale of Old Ltd. to P & L (70) 30.25
(iii) Goodwill
Old Ltd. (80%) New Ltd. (75%)
Sh. M Sh. M Sh. M Sh.
M
1,400
Less:
Retained profit on acquisition 240 195
Fair value adjustment (75% x 10) - 7.5
Pre-acquisition dividend (75) - (880) 37.5
(1365)
2
Goodwill 20 35
Impaired to date (to loss on sale) (10) -
Balance 10 (To B/s) 35
(b) Statement of changes in equity (extract)

Retained profits Sh. “M” Sh.
“M”
Hope: Bal b/f (1250 -335)
915
Good will in Old Ltd. Impaired
(10)
905
Share of post in acquisition in Old Ltd. (80% x (650 -300-40))
248
1,153
(c) Balance sheet workings
(i) PPE Inventor Receivables Payables

Accruals
Sh. M Sh. M Sh. M Sh. M Sh. M
Hope Ltd 2,500 600 450 400 20

New Ltd 1,900 500 350 430 50
4,400 1,100 800 830 70
Add: Fair value adjustment 10 - - - -
Depr. On fair value (1) - - - -
Inter-company balances - - (50) (50)
(10)
Unrealized profit - - - - -
4,409 1,060 750 780 60

(ii) Minority interests

Sh. “m”
Shareholders fund in new Ltd. 1,800
Add; Fair adjustments 10
Less: Depreciation on fair value adjustments (-1)
1,809
Share of MI at 245% 425.25
QUESTION TWO
(a) (i) Contingent share agreement

This is an agreement to issue shares that are dependent of the satisfaction of the specified
conditions.
Therefore, contingently issuable shares are those which will be issued depending on the outcome
of a single or series of events.
(ii) Anti dilution
This is an increase in earning of share or a reduction in loss per share resulting from the
assumption that convertible instrument are converted, that option or warrant are exercised, or
that ordinary shares are issued upon the satisfaction of specified conditions.
(b) (i) Calculation of basic earnings per share
(1) calculation of bonus shares included in the rights issue

Sh.
3 Outstanding ordinary shares at sh.80 each 240

1 right issue ordinary issue at Sh. 60 60
4 300
Therefore theoretical ex-right price = Sh. 300

4
= Sh. 75
Let x be the total of the existing shares and the bonus shares included in the rights issue.
Therefore X x Sh. 75 = 300,000 x Sh. 80

75x = Sh. 24,000,000
X= 320,000
But existing shares =300,000
Therefore bonus shares in the rights issue = 320,000-300,000

= 20,000
Therefore shares in the rights issue deemed to be issued for consideration
= (1/3x300, 000) – 20,000 =80,000
(2) Calculation of the net profit due to ordinary shareholders
2004 2005
Sh. ‘000’ Sh. ‘000’
Reported net profit 1,034 1,408

Less; preference dividends 400 400
634 1,008
(3) Calculation of the weighted average number of shares for basic EPS
2004 2005
Ordinary shares outstanding at the beginning of the year 300,000 600,000
Add: Rights issue – bonus shares 20,000
-Issued for consideration 9m x 80,000 60,000

12m
Shares issued for consideration on 1.10.2004 Sh.80 x 3m x 200,000) 40,000

Sh. 100 12m
Shares issued as a result of shares split [(600,000 x 2) – 600, 00]

600,000
Shares issued on conversion of debentures Sh.2000000x60x2x 3m 60 000

Sh. 1,000 12m 420,000 126,0000
Therefore basic EPS

For year 2004 = Sh. 634,000
420,000
= Sh. 1.51
2005 = Sh. 1,008,000

1,260,000
= Sh.0.80
(ii) Adjusted or comparative EPS for the year 2004

Calculation of adjusted number of ordinary shares for re –computation of basic EPS.

No. of
shares
Weighted average number of shares used in 2004 420,000
Add; Increase in shares due to share s split [(420,000 x 2) – 420,000] 420,000

840,000
Net profit due to ordinary shareholders = Sh. 634,000

Therefore adjusted basic EPS = Sh. 634,000
840,000
= Sh. 0.76
(2 marks)
(iii) Calculation of diluted earnings per share for the year 2005
Determination of separate earnings per share for potential ordinary shares

Increase in Increase in
EPS
Profit shares
Sh. Sh.
Stock options - Profit -
- Bonus shares 80,000
(200,000 x 2) – (200,000 x 2 Sh. 36
Sh. 45
- 80,000 NIL
Convertible debentures
Converted in the year
Profit (6 x 9m x Sh. 2m x 70) 63,000
100 12m 100
Shares 180,000
(Sh. 2m x 60 x 2) – 60,000
Sh. 1,000
63,000 180,000
0.35
Outstanding debentures increase in profit
(6 x Sh. 3,000,000 x 70) 126,000
100 100
Increase in shares Sh. 3,000,000 x 60 x 2 360,000
Sh. 1,000
126,000 360,000
0.35
Convertible preference shares
- Increase in profit 400,000
- Increase in number of shares 300,000
(100,000 x 3/2 x 2) 300,000
400,000 300,000
1.33
NB
The 60,000 deducted from shares issued on conversion of debentures are used in the
computation of weighted average number of shares used to calculate basic EPS.
Net profit from continuing operations for the year 2005 is given as follows
Sh.
Net profit due to ordinary shareholders 1,008,000
Add: Loss from discontinued operations 150,000

1,158,000
(iii) Determination of dilutive effect of potential ordinary shares
Profit Shares EPS

Sh. Sh.
Basic 1,158,000 1,260,000

0.92
Debentures converted in the 63,000 180,000
1,221,000 1,440,000
0.85
Stock options - 80,000
1,221,000 1,520,000
0.80
Outstanding debentures 126,000 360,000
1,347,000 1,880,000
0.72
Preference shares 400,000 300,000
1,747,000 2,180,000
0.80
From the above workings it is noted that conversion of preference shares would be anti dilutive
since EPS increases from Sh. 0.72 to Sh. 0.80 when they are converted.
Therefore diluted EPS is calculated as follows:
EP
S
Sh.
Profit from continuing operation (Sh. 1, 347,000 : 1,880,000)
0.72
Loss form discontinued operations (Sh. 150,000 : 1,880,000)
0.08
Diluted EPS
0.64
QUESTION THREE

(a) Valuation of 10,00 ordinary shares of Pana Ltd

(i) Net asset basis
Income statement extract

Sh. ‘000’ Sh. ‘000’
Tax (30%) 1,884
4,396
Dividends:
Preference 800
Ordinary 1,798
(2,598)
Retained profit b/f 4,500
Retained c/f 6,298
Revaluation account
Sh. ‘000’ Sh. ‘000’

Motor vehicles 350 Property
Furniture and fittings 50 Plant and equipment 5,500
Balance c/d 5,100
5,500 5,500
Fair value of net tangible assets due to ordinary shareholders

Sh. ‘000’
Share premium 3,000
Revaluation 5,100
Reserves (Retained profit) 6,298
Proposed ordinary dividends 1,798
32,196
Less: Premium on redemption of preference
Shares (10 x 10,000) (1,000)
100 31,196
Therefore price per ordinary share = Sh. 31,196,000

8000
= Sh. 38.995
~ Sh. 39
Therefore value of 10,000 shares = Sh. 39 x 10,000
= Sh. 390,000
(b) Dividend yield method
Calculation of ordinary dividend per share

2004 2005 2006
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Profit before tax 5,480 5,850 6,280
Tax 30% 1,644 1,755 1,884

3,836 4,095 4,396
Less: Preference dividends 800 800 800
Amount due to ordinary shareholders 3,036 3,295 3,596
Dividend payout 40% 45% 50%
Therefore ordinary dividends 1,214.4 1,482.75 1,798
Therefore dividend per ordinary share Sh. 1.52 Sh. 1.85 Sh.2.25
Therefore average dividend = Sh. [1.52 + 1.85 +2.25]

Per ordinary share 3
= Sh. 1.87
Comparable dividend yield for other companies
Pwani Ltd Bara Ltd mega Ltd

Earnings per share Sh. 4.40 Sh. 3.80 Sh. 4.0
Dividend per share Sh. 2.80 Sh.1.65 Sh. 1.4
Therefore dividend cover 4.40 3.80 4.0
2.80 1.65 1.4
1.57 2.30 2.86
Calculation of dividend cover of Pana Ltd
Average profits due to ordinary shareholders = Sh. [3,036 +3,295 + 3,596]

3
= Sh. 3,309,000
Therefore average earnings per share = Sh. 3,309,000
800,000
= Sh. 414
Average dividend per share = Sh. 1.87
Therefore dividend cover = Sh.4.14
Sh. 1.87
= 2.21 times
Alternatively
Dividend cover = Sh. 3,309,000

800,000 x Sh.1.87
= 2.21 times
From the above working it is observed that dividend cover of Pana Ltd. Is more or less the same
as the one of Bara Ltd. Therefore it is the dividend yield of Bara Ltd that is used to value the
shares of Pana as the two companies pay out as dividends almost the same proportion of profit
due to ordinary shareholders
Calculation of the price per ordinary share and the value of 10,000 ordinary shares
Dividend yield of Ltd = DPS x 100

MPS

= Sh. 1.65 x 100

Sh.55
= 3%
Dividend per share of Pana Ltd = Sh. 1.87

Therefore market price = 100 x Sh. 1.87
3
= Sh. 62.33
Therefore value of 10,000 shares = Sh. 62.33 x 10,000

= 623,000
(c) Earnings yield method
Earnings per share = Sh. 4.14

Earnings yield = 8%
Therefore price share = 100 x 4.14
8
= Sh.51.75
Therefore value of 10,000 shares = Sh. 75 x 10,000
= Sh. 517,500
(d) Using the on going concern method
Fair value of net tangible assets due to ordinary shareholders = Sh. 31,196,000
= 10%
Therefore normal profit on net assets = 10 x31, 196,000

100
= Sh. 3119,600
But actual average profit are = Sh. [3,036 + 3,295 +3,596]
3
= 3,309,000
Therefore super profits = 3,309000 – 3119600
= Sh.189, 400
Therefore goodwill = Sh. 189,400 x 3
= Sh. 568,200
Going concern value of the business = 31,196,000 +

568,200
= Sh.31, 764,200
Therefore price per ordinary share = Sh. 31,764,200
800,000
= Sh. 39.7
Therefore value of 10,000 shares = 10,000 x 39.7

= Sh. 397,000
QUESTION FOUR
(a) (i) Current service cost
This is apart of a pension cost incurred due to the services rendered by employees in the current
year.
It is calculated by the following formula
Service cost = pension % x 1 year x salary on date of retirement

The amount calculated above is discounted to the present date at an appropriate interest rate.
Service is treated as an expense of the current period.
(ii) Past service cost

This is an increase in projected pension liability resulting from service already provided by
employees. It is brought about by change in the way pension are determined especially change in
pension benefits.
The whole amount is not treated as pension expense in the year it is determined but is expensed
over the remaining average service years of the employees benefiting from the scheme.
(iii) Vested employee benefits

These are pension benefits employees have a right to receive even if their services were
immediately terminated. Pension benefits that are not conditional on employment.
For benefits to be vested, employees must have served for some minimum number of years.
(b) Calculation of annual pension expense
NB. The accounting treatment of actuarial gains and losses has changed due to the revisions on
IAS 19 ‘Employee benefits’. This is because IASB felt that, due to actuarial assumptions made in
arriving at values of pension obligations and plan assets, actuarial gains and losses must arise.
Therefore they are only recognized if they are significant. Significance is measured by using the
10% corridor rule. This rule requires only the actuarial gains and losses that exceed the higher of
10% of either Fair value of the plan assets or the Present Value of obligation at the start of the
year.
In December 2004 additional amendments were made on the standard and this allows firms to
recognize the full actuarial gains and losses but in a statement outside the income statement i.e.
the statement of recognized gains and losses.
In summary this example requires the treatment of actuarial gains and losses using the
old IAS 19 on Retirement benefit costs.
The solution is therefore prepared for information only but the example has been overtaken by
events.

Deficiency = Sh. 600 million

Service life of employees = 8 years.
Therefore amortization of deficiency = Sh. 600m : 8
= Sh. 75 million
Annual service cost = Sh. 30 million
Therefore total annual pension expense = Sh. 75m + Sh. 30m

= Sh. 105m
Calculation of prepaid or accrued pension cost
Year Contribution Pension expense Prepaid Cumulative

(Accrued) Prepaid /
(accrued)
Sh ‘m’ sh.m sh.m sh.m

1998 180 105 75 75
1999 180 105 75 150
2000 180 105 75 225
2001 180 105 75 300
2002 30 105 (75) 225
2003 30 105 (75) 150
2004 30 105 (75) 75
2005 30 105 (75) –
Hint
It is the cumulative period pension cost that would appear in the balance sheet prepared at the
end of each year.
(b) Calculation of annual pension expense
Surplus = Sh. 320 million

Remaining service life employees = 10 years
Therefore amortization of surplus per year = Sh. 320 million : 10
= Sh. 32 million
Annual service cost = Sh. 60 million
Therefore net pension expense = Sh. 60m – Sh. 32m
= 28 m
Calculation of pre-paid or accrued pension cost
Year Contribution Pension Prepaid Cumulative/Prepaid

Expense (accrued) (accrued) pension
Pension cost cost
Sh.m Sh.m Sh m Sh.m’
1996 - (28) (28) (28)
1997 - (28) (28) (56)
1998 - (28) (28) (84)
1999 40 (28) 12 (72)
2000 40 (28) 12 (60)
2001 40 (28) 12 (48)
2002 40 (28) 12 (36)
2003 40 (28) 12 (24)
2004 40 (28) 12 (12)
2005 40 (28) 12 NIL
It is the cumulative accrued pension cost that would appear in the balance sheet.
QUESTION FIVE
a) Reasons for providing for tax on revaluation of assets
1) Revaluation of an asset is treated as a gain and therefore subject to tax. Since it

is unrealized gain is not paid on it immediately but in future hence deferred tax.
2) Revaluation of assets increases depreciation expense. Therefore computation of
tax using deferred tax method based on profit and loss balances would result in
deferred tax. It is necessary to provide for deferred tax on revaluation of an
asset.
b) Merits and demerits of deferred tax

Merits
1) The method charges the correct tax on the profits of the period irrespective of
the date of payment.
2) The method makes a business report the correct profit for the profit for the
period after charging the correct tax.
3) By reporting the correct profit it is possible to compare the performance of a
business with performance of other business.
Demerits
1) Temporary differences that bring about deferred tax rarely reverse and
therefore the tax would rarely materialize to be paid. Therefore it is not
necessary to use deferred tax method.
2) Legally a business is not required to pay deferred tax and therefore it is not
necessary to provide for it.

3) Computation of deferred tax requires proper accounting records for temporary

differences and expertise in the subject area. This may be costly to many
organizations.
4) Categories of financial instruments (IAS 39)
(1) Fair value through the Profit and loss account

This is a financial liability that meets either of the following conditions:
i) It is classified as held for trading. A financial asset or financial liability is
classified as held for trading if it is:-
• Acquired or incurred principally for the purpose of selling or
purchasing it in the near term;
• Part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of
short-term profit-making; or
• A deviation (except for a derivate that is a designated an effective
hedging instrument).
ii) Upon initial recognition, it is designated by the entity as at fair value

through profit or loss. Any financial asset or financial liability within the
scope of this standard may be designated when initially recognized as
financial asset or loss except for investments in equity instruments that do
not have a quoted market price in an active market and whose fair value
cannot be reliably measured.
(2) Held-to- maturity investments:
These are non-derivative financial assets with fixed or determinable payments and
fixed maturity that an entity has the positive intention and liability to hold to
maturity other than:
• Those that entity upon initial recognition designated as at fair value through
profit or loss;
• Those that the entity designates as available for sale; and
• Those that meet the definition of loans and receivable.
An entity shall not classify any financial assets as held to maturity if the entity has, during
the current financial year or during the two preceding financial years, sold or classified more than
an insignificant amount of held-to-maturity investments before maturity (more than insignificant
in relation to the local amount of held-to-maturity investments) other than sales or
reclassifications that:
• Are so close to maturity or the financial assets call date (for example, less than
three months before maturity) that changes in the market rate of interest would
not have a significant effect on the financial asset’s fair value.
• Occur after the entity has collected substantially all the financial asset’s original
principle through scheduled payments or prepayments; or
• Are attributable to an isolated event that is beyond the entity’s control, is non
recurring and could not have bees reasonable anticipated by the entity
(3) loans are receivables
These are non-derivative financial assets with fixed or determinable payments that
not quoted in an active market, other than;
• Those that the entity intends to sell immediately or in the near term, which
shall be classified as held for trading, and those that the entity upon initial
recognition designates as at fair value through profit or loss
• Those that the entity upon initial recognition designates as available for sale;
or;
• Those for which the holder may not recover substantially all of its initial
investment, other than because of credit deterioration, which shall be classified
as available for sale.
An interest acquired in a pool of assets that are not loans or receivables (for example, an
interest in a mutual fund or a similar fund) is not a loan or receivable.
(4) Available for sale financial assets:
Are those non-derivative financial assets that are designated as available for sale or
are not classified as (i) loans and receivables (ii) held-to-maturity investments or (iii)
financial assets at fair value through profit or loss.

Comprehensive Mock Examinations 271
Part III: Comprehensive Mock Examinations
Questions - Mocks
PAPER ONE
Time Allowed: 3 hours
Answer ALL QUESTIONS. Marks allocated to each QUESTION are shown at the end of
the QUESTION. Show ALL your workings.
QUESTION ONE
Wakili Limited was formed in 1983 to manufacture Fax machines. The directors decided to
expand their exports and on 1 January 2001acquired investments in a Tanzanian company,
Fedha Inc. and a Ugandan company, Mshiriki which were to act as selling agencies for the
company’s products.
The investments consisted of 800,000 shares of TSh. 10 each in Fedha Inc. when its
reserves were TSh. 25 m and of 2,250,000 shares of UGSh. 20 each in Mshiriki when its
reserves were UGSh. 30m. At the dates of acquisition, the book values were the same as
the fair values.
The directors have instructed their accountant to prepare draft consolidated accounts as at 31
December 2001 on the basis that Fedha Inc. is a subsidiary undertaking due to the fact that they
exercise a dominant influence, and that Mshiriki is a participating interest but not an associated
undertaking.
The balance sheets as at 31 December 2001 were as follows:
Wakili Fedha Mshiriki

Sh. m Tsh. M Ug. Shm
Non Current Assets
Tangible assets 669 458 4,231
Investment in Fedha 12
Investment in Mshiriki 10
Current Assets
Stocks 675 44 404
Cash 46 113 1,038
Current liabilities
Creditors (490) (31) (288)
Non-Current Liabilities
Loan (370) (103) (954)
552 481 4,431

272 Questions – Mocks
The profit and loss accounts for the year ended 31 December 2001 are as follows:
Wakili Fedha Mshiriki

Sh. m Tsh. M Ugsh.m
Turnover 2,784 1,150 10,615
Cost of sales 1,822 _775 _7,154
Gross profit 962 375 3,461
Distribution costs 392 90 831
Administrative expenses 370 30 278
Depreciation 35 24 230
Dividend from Fedha (12)
Dividend from Mshiriki _(11) ___ ____
Profit before tax 188 231 2,122
Tax __93 __90 _831
Profit after tax 95 141 1,291
Dividends paid 31.7.2001 __37 __51 _440
Retained profit __58 __90 _851
Further information:
1. The non current assets in both Fedha and Mshiriki were acquired on 1 January 1993.
They are stated at cost less depreciation and there have been no acquisitions or disposals
during the year.
2. Stocks
31 December 2000 31 December 2001
Stock Exchange rate Stock Exchange rate
at purchase date at purchase date
Fedha TSh.m 57 2.0 44 1.6
Mshiriki Ugsh.m 523 11.5 404 8.5
3. Exchange rates have been as follows:

Tsh. = Sh.1 Ugsh. = Sh. 1
1 January 1993 2.4 12.0
1 January 1997 2.0 12.5
31 December 2000 1.8 11.0
Average for 2001 1.7 10.0
31 July 2001 1.7 10.0
31 December 2001 1.5 8.0
4. Wakili’s plc policy is to write off goodwill immediately on acquisition
5. The foreign exchange translation of the foreign subsidiary is to be on the basis that the
functional currency of the Tanzanian operation is shilling.
6. There has been no change in the share capital of Fedha Inc. or Mshiriki since the date
of acquisition.
Required:
a) Prepare a draft consolidated income statement for the Wakili group for the year ended 31
December 2001 and a draft consolidated balance sheet as at that date. (14 marks)
b) i) Calculate the effect on the consolidated income statement for the year ended
31 December 2001 if the investment in Mshiriki is classified as an associated interest.
ii) Calculate the carrying value of the investment in the consolidated balance sheet as at 31
December 2001. (6 marks)
(Total: 20 marks)
QUESTION TWO
a) ‘Reported earnings per share is a very important indicator of performance for a quoted
company’ Why do you think that this is, and do you agree?
The following information relate to Kisima group and Mawele Ltd.
Kisima Ltd. Mawele Ltd.

Year ended 30 June 2000 2001 2002
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Turnover 2,000 3,400 4,500
Cost of sales _900 _800 1,500
Gross profit 1,100 2,600 3,000
Distribution costs 150 240 310
Administrative expenses _260 _410 _420
Profit on ordinary activities after tax 690 1,950 2,270
Taxation _230 _640 _750
Profit on ordinary activities after tax 460 1,310 1,520
Dividends _100 _200 _250
Profit of the financial year _360 1,110 1,270
(5 marks)
b)
Kisima Ltd was formed fifteen years ago. As at 1 July 1999, the issued share capital of the
group was as follows, all shares being issued at par.
800, sh 1 Ordinary share at Sh. 100 800,000

200, sh 1 Ordinary share at Sh. 100 200,000
1,000,000
On 1 October 1999 Kisima Ltd received the monies due on the partly paid shares.
Required:
Calculate the earnings per share figure for the year ended 30 June 2000 as it would appear in
the financial statements of the group. (3 marks)
c) On 28 February 2001 Kisima group made a 1 for 4 rights issue at Sh. 130 per share. The
actual cum rights price was Sh. 190 per share on the last day of quotation cum rights.
Required:
Calculate earnings per share for the year ended 30 June 2001. Show the comparative figure for
2000. (5 marks)

d) On 1 January 2002 a new group Mawele Ltd was formed for the purpose of taking the
business of Kisima Ltd. Kisima Ltd was to issue 2 shares for every 1 share in Kisima Ltd..
In preparing the financial statements of Mawele Ltd, which is essentially a continuation of
Kisima Ltd, merger accounting principles were adopted.
Required:
Calculate the earnings per share for the year ended 30 June 2002. Show the comparative
figure for 2001. (5 marks)
QUESTION THREE
a) In relation to deferred tax explain the meaning, advantages and disadvantages of the
following bases for computing deferred tax.
i) Nil provision
ii) Full provision
iii) Partial provision (15 marks)
b) XYZ Ltd prepares its account to 31 December each year. At 31 December 2001 the
accounts NBV of non current assets ranking for capital allowance exceeds tax WDV by Sh.
750,000 but the company has hitherto not provided for deferred tax.
The company has produced the following forecast resulting from planned capital
expenditure over the next few year:
Year Capital Depreciation Timing differences

allowances Originating Reversal
Sh ‘000’ Sh ‘000’ Sh. ‘000’ Sh. ‘000’
2002 1,600 1,400 200
2003 1,750 1,600 150
2004 1,100 1,670 570
2005 onwards – capital allowances are likely to be well in excess of depreciation.
You are required: to show the deferred tax charges in the profit and loss account, and the
provisions required in the balance sheet, for each year 2001 to 2004 using:
a) full provision;
b) Partial provision.
Assume that there are no other timing differences to be considered and that the tax rate is 30%.
(5 marks)
(Total: 20 marks)
QUESTION FOUR
IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operation was published in March
2004, and is effective from 1 January 2005 although earlier adoption is allowed. It replaces IAS
35 ‘Discontinuing operations.’
Required:
a) i) List and comment on IFRS 5’s definition of discontinued operation (3 marks)
ii) Summarize the information that has to be disclosed in financial statements in relation to a
discontinued operation. (2 marks)
b) For many years ABC Ltd operated with four different divisions, Pharmaceuticals, food
processing, car retailing and organic fertilizers. On 30 September 2000, ABC Ltd sold its
engineering division (reported under discontinuing operations) and acquired a computer
software company. ABC Ltd policy is to separately disclose newly acquired operations as
part of its continuing figures. The details of the company’s sales revenue and operating
profit as reported in its published financial statements to 31 March 2001 are:
Year ended 31 March 2001

Continuing
Previous Newly Acquired Discontinued Total
(software) (engineering)
Sh.m Sh.m Sh.m Sh.m
Sales revenue 500 120 100 720
Cost of sales (270) (70) (108) (448)
Gross profit 230 50 (8) 272
Other operating expenses (50) (10) (12) (72)
Profit before tax 180 40 (20) 200
During the year to 31 March 2002 the Board implemented a strategic decision to change the
market sector of its food processing division. The company had previously targeted the
expensive. In the food processing sector aimed mainly at business clients. The new strategy
was to aim at cheaper end. The change meant that most of the existing units were sold and
new ones bought, although some units were retained and refurbished to suit the new
market. The Board wished to treat the results from the expensive end of the food
processing as a discontinued operation and the results from the new cheaper end market as
a newly acquired business. Details from the draft financial statements for the year to
31 March 2002 are:
Sh.m
Sales revenue 750
Cost of sales (420)
Gross profit 330
Operating expenses (80)
Operating profit before tax 250
The results of the hotel division are included in the above figures. Its turnover of Sh. 140
million was contributed equally by the old and new market sectors, however the gross profit
margin on the new sector was 30% whilst the old sector suffered a gross loss of 20%.
Operating expenses were Sh. 24 million and allocated on the basis of turnover. In the year
to 31 March 2001 the hotel division turnover of Sh. 60 million, a gross profit margin of 15%
and operating expenses of Sh. 18 million.
Required:
Adopting the Board’s wish with regard to the accounting treatment of the Food processing
division; prepare an analysis of ABC Ltd results into continuing and discontinuing
operations (as far as the information permits), including the comparative figures, for the year
to 31 March 2002 as required by the company’s policies and IFRS 5 ‘Discontinued
Operation.’ (10 marks)
(Total: 15 marks)

QUESTION FIVE
For many years, many accounting professions in the world have attempted to formulate a
method of preparing financial statements that takes account of the effects of price increases
(inflation). It seems that no proposed method of reflecting the effects of changing prices has
gained acceptance. Advice from the International Accounting Standards Committee is that no
form of accounting for price changes should be made compulsory, but companies are
encouraged to present such information.
There have been two main methods put forward for reporting the effects of price changes. One
method is based on the movements in general price inflation (as measured by the Retail Price
Index – RPI) and is referred to as Current Purchasing Power accounting (CPP); the other
method is based on specific price changes of goods and is generally referred to as Current Cost
Accounting (CCA).
Required:
a) Explain the limitations of (pure) historic cost accounts when used as a basis for assessing the
performance of an enterprise. You should give an example of how each of three different
user groups may be misled by such information. (10 marks)
b) Describe the advantages and criticisms of CPP and CCA accounting. (10 marks)
(Total: 20 marks)
PAPER TWO
Time Allowed: 3 hours
Answer ALL QUESTIONS. Marks allocated to each QUESTION are shown at the end of
the QUESTION. Show ALL your workings.
QUESTION ONE
M. Ltd. started operating several years ago. As a strategy to expand its operations, its
management has in the recent past purchased shares from other companies, whose trial balances
are given below:
Trial balance as at 31 December 2001

M Ltd. H Ltd. C Ltd. A Ltd.
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Property and equipment 250,000 220,000 200,000 96,000
7,500,000 ordinary shares of Sh. 10 each in H Ltd. 165,000 - - -
6,000,000 7% non-cumulative preference shares of
Sh. 10 each in H Ltd. 60,000 - - -
6% debentures in H Ltd. 5,000 - - -
1,800,000 ordinary shares of Sh. 10 each in A Ltd. 26,100 - - -
6,400,000 equity shares in C Ltd. of Sh. 10 each - 102,000 - -
Current assets 145,500 143,400 120,000 _50,000
651,600 465,400 320,000 146,000
Ordinary shares of Sh.10 each 300,000 100,000 80,000 60,000

7% non-cumulative preference shares of Sh. 10 each - 80,000 - -
General reserve 50,000 40,000 40,000 6,000
Profit and loss account 98,500 44,400 100,000 30,000
Provision for depreciation 60,000 130,000 40,000 20,000
6% debentures - 20,000 - -
Proposed dividend: Ordinary 30,000 10,000 - 10,000
Preference - 5,600 - -
Accrued debenture interest - 1,200 - -
Trade payable 113,100 34,200 60,000 20,000
651,600 465,400 320,000 146,000
1. The general reserve of all the companies were the same as they were one year ago. The
profit and loss account balances of C. Ltd. and A. Ltd were Sh.16 million and Sh.21 million
respectively at the time their shares were purchased, one year previous to the preparation of
the balance sheets provided.
2. M Ltd. acquired the shares of H Ltd cum-dividend on 1 January 2001. The balance on the
profit and loss account of H Ltd. consisted of the following:
Shs.‘000’

Net profit for the period ended 31 December 2001 32,000
60,000
Less proposed dividend (15,600)

3. The balances on the profit and loss account of H Ltd. at the acquisition date is after
providing for preference dividend of Sh.5.6 million and a proposed ordinary dividend of
Sh.5 million, both of which were subsequently paid and credited to the profit and loss
account of M Ltd.
4. No entries have been made in the books of M Ltd. in respect of debenture interest due
from, or proposed dividends from two of its investments, except that dividends due from A
Ltd. were credited to M Ltd.’s profit and loss account and the corresponding entry made in
its debtor.
5. The debentures of H Ltd. were purchased at par.
6. The stock in trade of H Ltd. on 31 December 2001 includes Sh.6 million in respect of goods
purchased from M Ltd. These goods had been sold by M Ltd. at such a price that M Ltd.
earned a profit of 20% on the invoice price.
7. The group policy is to account for any associate company using the equity method.
Goodwill arising on consolidation is amortized using the straight-line method over a useful
life of five years, (assuming a zero residual value) a proportionate charge being made for any
period of control of less than a full year. All unrealised profit on closing stock is removed
from the accounts of the company that realized it, giving a proportionate charge to the
minority interest is appropriate.
8. Dividends to minority interest shareholders are shown as part of minority interest.
9. H Ltd. sold a fixed asset on 31 December 2001 to M Ltd. for Sh.20 million, making a 20%
profit on the invoice price. H Ltd. depreciates its assets at 20% using the straight-line
method. H Ltd’s accountant erroneously used the selling price for depreciation purposes,
however, the cost of assets reflected the correct amounts.
Required:
A consolidated balance sheet of M Ltd. and its subsidiaries as at 31 December 2001. (25 marks)
QUESTION TWO
Golden Treasures Retirement Benefit Scheme is a defined benefit scheme that has been
operating for the last 30 years. The General Manager cannot understand why the accountants
have been charging a constant pension cost in the financial statement different from the
amounts of actual contributions made during the period. The fund accountant has explained to
him that this is as a result of the difference between funding and accounting for pension
schemes in periods of pension scheme surpluses or deficits arising from variations in regular
costs that are caused by factors such as experience adjustments and effects of changes in
actuarial assumptions.
Required:
a) With reference to IAS 19 (Employee Benefits, Revised 1999), define the following terms:
i) Experience adjustments. (2 marks)
ii) Accrued benefit valuation methods. (2 marks)
iii) Current service cost. (2 marks)
iv) Vested employee benefits. (2 marks)
b) The actuarial valuation of Golden Treasures Retirement Benefit Scheme as at 31 December

2001 showed a deficiency of Sh.90 million. The actuary recommended that the company
eliminates the deficiency by three lump sum payments of Sh.30 million each in addition to
the standard contribution of Sh.10 million per annum. The contributions would continue at
Sh.10 million per annum thereafter. The average remaining service life of employees in the
scheme as at 31 December 2001 was 10 years.
Required:
Determine the charge in the income statement and the figure to be disclosed in the scheme’s
balance sheet as a net pension liability or prepayment in each of the years 2002 to 2011.
c) Suppose the actuarial valuation at 31 December 2001 of Golden Treasures Retirement

Benefit Scheme showed a surplus of Sh.260 million. The actuary then recommended the
company eliminates this surplus by taking a contribution holiday for the first two years and
them pay yearly contributions of Sh.60 million for eight years. After the eight year, the
standard contribution would be Sh.50 million per annum. The average remaining service
life of the employees in the scheme as at 31 December 2001 was 10 years.
Required:
Compute the figure to be charged in the income statement and the figure to be disclosed in
the balance sheet of the scheme as a net pension liability or prepayment in each of the years
2002 to 2011. (6 marks)
Note: Parts (b) and (c) are independent of each other. (Total: 20 marks)
QUESTION THREE
Gawanya Ltd. is preparing a segmental report for inclusion in its financial accounts for the year
ended 31 December 2001. The figures given below relate to Gawanya Ltd. and its subsidiaries
but exclude information on associated companies.
Sh. ‘000’
Sales to customers outside the group by stationery division 11,759
Sales to customers outside the group by Kenyan companies 28,200
Sales not derived from stationery, tissue or packaging activities 3,290
Sales made to customers outside the group by the tissue division 18,390
Assets used by the Ugandan subsidiary companies 30,600
Assets not allocable to stationery, tissue or packaging activities 14,856
Assets used by the stationery department 31,750
Sales by the tissue division to other group members 3,658
Assets used by the packaging division 17,775
Assets used by the Kenyan companies 41,820
Sales not allocated to Kenya, Uganda or other areas 3,290
Sales by the stationery division to other group members 1,227
Sales made by the group to other of the world 1,481
Expenses not allocated to Kenya, Uganda and other areas 4,073
Sales to customers outside group by Ugandan companies 7,227
Expenses not allocated to stationery, tissue or packaging services 5,004
Sales by Ugandan companies to group members 2,117
Sales to customers outside the group for bureau service 5,200

Sales by Kenyan companies to other group members 2,430
Assets used by the tissue division 44,620
Assets used by the group in other areas 21,660
Assets not allocated to Kenya, Uganda or other areas 14,921
Segmental net profit by industry - Stationery 2,442
- Tissue 5,916
- Packaging 821
Segmental net profit by geographical area - Kenya 4,873
- Uganda 3,127
- Other areas 487

Consolidated net profit by industry 8,978

Consolidated net profit by geographical area 8,047
Required:
a) An industry and geographical segmental report in accordance with IAS 14 (Reporting
Financial Information by Segment) for inclusion in the annual report to give the
maximum information to the shareholders. (12 marks)
b) Using Gawanya Ltd.’s figures as illustrations, discuss items for which you consider there
is a need for further information to assist the reader to interpret the segmental data.
(3 marks)
c) Identify the problems associated with segmental reporting. (5 marks)
(Total: 20 marks)
QUESTION FOUR
a) Briefly explain what is meant by off-balance sheet financing and its effect on the financial
statements. (5 marks)
b) The summarised cash account and the fixed asset schedule of Pivot Ltd. for the year ended
31 December 2001 are as given below:
Summarise cash account

Sh. ‘000’ Sh. ‘000’
Balance brought down 500 Wages 1,350
Cash from cash sales 3,500 Cash paid to suppliers 4,320
Cash from credit sales 5,750 Tax paid 100
Cash from issue of shares 1,200 Cash paid on finance lease 700
Cash from sale of buildings 970 Final dividend for year 2000 100
Interim dividend for year 2001 50
Other expenses 600
_____ Balance carried down _4,700
11,920 11,920
Balance brought down 4,700
Fixed asset schedule

Plant Sh. ‘000’ Building Sh. ‘000’ Total Sh. ‘000’
Cost at 1 Jan 2001 10,000 15,000 25,000
Acquisitions 4,730 - 4,730
Disposal ____- (5,000) (5,000)
Cash at 31 Dec 2001 14,730 10,000 24,730
Balance brought forward 3,500 6,000 9,500
Charge for the year 650 1,500 2,150
Disposals ___- (4,500) (4,500)
Balance as at 31 Dec 2001 4,150 3,000 7,150
Other information:
1. Tax charge for the year was Sh.400,000. The opening balance on the tax liability account
was Sh.100,000.
2. The proposed final dividend for the year 2001 was Sh.120,000.
3. Other expenses include insurance, which is paid a year in advance on 30 June. In the year
2000, insurance of Sh.300,000 was paid. The amount paid in the year 2001 was Sh.400,000.
4. Accrued wages were Sh.75,000 at 1 January 2001 and Sh.95,000 at 31 December 2001.
5. Stocks were Sh.1,500,000 at 1 January 2001 and Sh.1,700,000 at 31 December 2001.
6. All Sh.700,000 paid on the finance lease in the year 2001 represented capital. This was the
first year of the lease and interest was not paid until the second payment, which was made in
the year 2002. Interest at Sh.403,000 was included in the year 2002 payment and was
accrued in the year 2001 financial statements.
7. Opening and closing trade debtors and trade creditors were:
1 January 2001 31 December 2001

Sh. Sh.
8. 6,000 ordinary shares of sh.100 per value were issued at a premium on 1 March 2001.
9. Revenue reserves of Pivot Ltd. as at 31 December 2000 were Sh.948,000.
10. Revenue reserves of Pivot Ltd. as at 31 December 2001 were Sh.1,680,000.
Required:
A statement of cash flow using the direct method, including a reconciliation of the profit for the
year with cash from operations. (15 marks)
(Total: 20 marks)
QUESTION FIVE
a) Identify and explain five indicators which show that an impairment loss to a fixed asset may
have occurred. (7 marks)
b) Explain the problems associated with replacement cost accounting and net realizable value
accounting when used as alternatives to historical cost accounting. (8 marks)
(Total: 15 marks)

PAPER THREE
QUESTION ONE
J Ltd purchased 60% of the ordinary share capital of KSA Ltd. incorporated in the country of
Frank whose currency is the Fran (Fr) on 1st of January 2001 when there was a credit balance on
the accumulated profit of KSA Ltd of Fr 60,000. Both companies sell a range of camping
equipment to campers. The financial statements of both companies as at 31st December 2004 are
as follows:
Draft Balance sheet as at 31st December 2004

JLtd KSA Ltd
Kshs. Fr.
Ordinary shares of Kshs 1,Fr 1 250,000 500,000
Accumulated profit 508,000 239,200
Taxation 200,000 109,000
1,155,000 938,200
Land at cost 300,000 580,000

Buildings: Cost 280,000 240,000
Depreciation (28,000) (108,800)
Plant: Cost 274,000 91,500
Depreciation (108,000) (38,500)
Inventory 80,000 64,000
Investment in subsidiary 70,000 -
Cash 84,000 24,000
1,155,000 938,200
Draft income statements for the year ended 31st December 2004
J Ltd KSA Ltd
Ksh Fr
Sales 780,000 840,000
Opening inventory (FIFO) 20,000 60,000
Purchases 340,000 320,000
Goods available for sale 360,000 380,000
Ending inventory (FIFO) (80,000) (64,000)
Cost of sales 280,000 316,000
Gross profit 500,000 524,000
Expenses (109,000) (244,000)
Operating profit 391,000 280,000
Dividend from subsidiary __6,250 _______
Profit before taxation 397,250 280,000
Taxation (200,000) (109,000)
Profit after taxation 197,250 171,000
Dividend paid _______ (50,000)
197,250 121,000
(a) J Ltd has declared a final dividend of 50% which has not yet been incorporated into it’s
books
(b) Both companies have provided for depreciation on their buildings at 2% pa on cost and
depreciation at 10% pa on cost on plant and machinery. Full depreciation is provided
on additions acquired during the year.
(c) KSA Ltd. purchased all it’s assets when the exchange rate was Fr 8 = Ksh 1 before
being acquired by J Ltd, with the exception of additions to buildings costing Fr.40,000
on 30 June 2004
(d) In the year ended 31 December 2004, J Ltd sold goods worth KShs 10,000 to KSA Ltd.
These goods had been marked up by J Ltd at 25%. These goods are part of the
inventory of KSA Ltd as at 31st December 2004
(e) The following exchange rates are relevant:
1st Jan 2004 Fr 5.5: Kshs 1

30th Jun 2004 Fr 5.0: Kshs 1
30th Sept 2004 Fr 4.8: Kshs 1
31st Dec 2004 Fr 4.5: Kshs 1
1st Jan 2001 Fr 6: Kshs 1
(f) The activities of KSA Ltd are considered to be an integral part of the acitivities of J Ltd.
Required:
Prepare the full group income statement and statement of changes in equity, with separate line
items for the gain or loss on exchange, for the year ended 31st December 2004 and the
consolidated balance sheet as at 31st December 2004. (25 marks)
QUESTION TWO
a) In line with IAS 2, briefly define and comment
i) Normal capacity
ii) Fixed and variable overhead
iii) Excluded costs
b) The following information extracted from Tuzo Limited’s balance sheet as at 31/12/04
Assets: Shs. 000

Stock:
Item W 1,000 kgs 5,000
Item Y 2,000 kgs 6,400
Item Z 500 kgs 8,000 19,400
i) The cost of W includes Sh.2,000,000 oveheads allocated on the basis of Sh.100 per
labour hour. 5% of total labour hours was however not productive due to a strike.
ii) Also included are administration and storage costs of Sh.500,000 and sh.640,000
respectively.
iii) Analysis of additional cost reveals:

W Y
Direct labour hours: 20,000 60,000
Labour rate per hour: 50 50
Overhead per hour Sh.100 Sh.100
Conversion Sh.600,000 Sh.330,000
Normal losses 10%
Transportation (5kg) 200 200
Selling and distribution (per Kg) 5 50
Selling price (per Kg) 8,000 12,000
iv) Z would be mixed with Beta and sold as Beta Z. Mixing ratio is at 2:1 with an
expected loss of 5%. Mixing costs would be Sh.900,000 packaging Sh.400,000
branding Sh.180,000 and storage Sh.180,000 and storage awaiting sale Sh.20,000
v) Beta Z can be packaged in 10gm containers selling at S.200 each.
vi) Transportation, selling and distribution costs on Beta Z would be sh. 50,000 and
sh.75,000 respectively.
Required:
Detailed schedules of inventory valuation. (Hint: Inventory is valued at the lower cost or net
realizable value). (Total: 20 marks)
QUESTION THREE
Waganga ltd, a pharmaceutical company owns an ageing plant at the industrial area. The
company also owns an office building in Nairobi city centre, which houses the Head office and a
number of tenants.
The company’s board of directors has resolved to centralize all the company’s operations by
relocating the head office to the industrial area. However, before this can be done, the plant will
have to be renovated and expanded. This is expected to take five years.
In order to finance the planned capital expenditure, the company has negotiated to sell the office
building to an insurance company for sh.85 million. The company will then lease the space it
currently occupies from the new owner for an amount of Sh.5 million per year for 5 years.
The company’s accountant is at a loss on how to account for this transaction and has come to
you for help. In your discussion with him, you have established that the office building was
carried in the books at sh.60 million and has been valued by a reputable valuer at sh.70 million.
Required:
a.) Calculated the amounts which should be charged or credited to the company’s income
statement for the current year and each of the subsequent years in order to comply with the
requirements of IAS 17 (Accounting for Leases) (7 marks)
b.) What would your answer to (a) be if the selling price was sh.50 million and the annual rental
a bargain at Sh.1.5 million? Similar spaces are going for Sh.2 million (7 marks)
c.) New information available shows that the fair market value of the building was sh.100
million and the annual rental sh.2 million. How does this affect your answer to (a) above?
(6 marks)
(Total: 20 marks)
QUESTION FOUR
Acquirer is an enterprise that regularly purchases new subsidiaries. On 30th June 2004, the
enterprise acquired all the equity shares of Prospects for a cash payment of Sh.260million. The
net assets of prospects on 30 June 2004 were sh.180 million and no fair value adjustments were
necessary upon consolidation of prospects for the first time.
On 31st December 2004, Acquirer carried out a review of the goodwill on consolidation of
prospects for evidence of impairment. The review carried out despite the fact that there were no
obvious indications of adverse trading conditions for prospects, the review involved allocating
the net assets of prospects into three cash-generating units and computing the value in use of
each unit. The carrying values of the individual units before any impairment adjustments are
given below.
Unit A Unit B Unit C

Patents 5 - -
Property, plant and equipment 60 30 40
Net current assets 20 25 20
85 55 60
Value in use of unit 72 60 65
It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash-
generating units, but all other net assets of prospects are allocated in the table shown above. The
patents of prospects have no ascertainable market value but all the current assets have market
value that is above carrying value. The value in use of Prospects as a single cash-generating unit
at 31st December 2004 is Sh.204 million.
Required:
(a) Explain what is meant by cash generating unit. (5 marks)
(b) Explain why it is necessary to review the goodwill on consolidation of Prospects for
impairment at 31 December 2004. (3 marks)
(c) Demonstrate how the impairment loss in unit A will affect the carrying value of the net
assets of Unit A in the consolidated financial statement of Acquirer. (5 marks)
(d) Explain and calculate the effect of impairment review on the carrying value of the goodwill
on consolidation of Prospectus at 31st December 2004. (7 marks)
(Total: 20 marks)
QUESTION FIVE
a) As with social accounting, environmental accounting is really a philosophy of reporting and
accounting rather than a specific accounting technique.
Required:
(i) With reference to the above statement, outline the issues that should be reported in the
reporting of environmental information in financial statements. (5 marks)
(ii) Discuss the argument(s) against the adoption of environmental accounting. (5 marks)
b) Mkulima Ltd had a herd of 10, 2 year old animals at 1 January 2004. One animal aged 2.5
years was purchased on 1 July 2004 for Sh.1,080 and one animal was born on 1st July 2004.

No animals were sold or disposed off during the period. Per-unit values less estimated point
of sales costs were as follows:
Shs.
2 year old animal at 1st January 2004 1,000
New born animal at 1st July 2004 700
2.5 year old animal at 1 July 2004 1,080
New born animal at 31st December 2004 720
0.5 year old animal at 31 December 2004 800
2 year old animal at 31st December 2004 1,050
2.5 year old animal at 31st December 2004 1,110
3 year old animal at 31st December 2004 1,200
Required:
Prepare a fair value movement schedule for the above herd of animals for the period ending 31st
December 2004 (show all your workings) In accordance with IAS 41 ‘Agriculture.’ (5 marks)
(Total: 15 marks)
Answers – Mocks
PAPER ONE
QUESTION ONE
a) Consolidated income statement for the Wakili Group for the year ended 31 December 2001
Wakili Fedha Consolidated
Sh.m Sh.m Sh.m
Turnover 2,784 676.5 3,460.5
Cost of sales 1,822 449.2 2,271.2
Gross profit 962 227.3 1,189.3
Distribution costs 392 53.0 445.0
Administrative expenses 370 17.7 387.7
Depreciation 35 12.0 47.0
Dividends (23) (11.0)
Exchange differences 6.5 6.5
Profit before tax 188 138.1 314.1
Tax 93 53.0 146.0
Profit after tax 95 85.1 168.1
Minority interests 60% of 85.1 51.0
117.1
Dividends 37.0
80.1
Consolidated balance sheet as at 31 December 2001

Wakili Fedha Consolidated
Sh.m Sh.m Sh.m
Non-current assets
Tangible assets 669 229.0 898.0
Investment in Mshiriki 10 10.0
Current assets
Stock 675 27.5 702.5
Cash 46 75.3 121.3
Current liabilities
Trade creditors 490 20.7 510.7
Creditors due after more than one year
Loans 370 68.7 438.7
782.4

Share capital 185.0
Profit and loss account 452.0
Minority interest (60% of 242.4) 145.4
782.4
Statement of group reserves for the year ended 31 December 2001
Profit and loss account at 31 December 2000 371.9
Profit and loss account at 31 December 2001 452.0

288 Answers – Mocks
BALANCE SHEET
Sh. Sh.
ASSETS
Non current assets
Tangible assets 898.0
Investment in Mshiriki 10.0
908.0
Current Assets
Stock 702.5
Cash 121.3
823.8
Total Assets 1731.8
Capital and Reserve
Share capital 185
Profit and loss account 452
637
782.4
Loans 438.7
Current Liabilities
Creditors 510.7
Total Equity and Liabilities 1731.8
b)
i) Calculate effect on the consolidated profit and loss account if Mshiriki investment is treated
as an associated undertaking.
The profit and loss account for the year ended 31 December 2001 will be translated using
the closing rate to arrive at the profit before tax; tax and profit after tax figures.
Mshiriki Exchange Included in the

Ugsh. rate consolidation Sh.m
Turnover 10,615
Cost of sales 7,154
Gross profit 3,461
Distribution costs 831
Administrative expenses 278
Depreciation 230
Profit before tax 2,122 8.0 265.3
Tax 831 8.0 103.9
Profit after tax 1,291 8.0 161.4
Dividends paid 31.7. 2001 440
Retained profit 851
Sh.m
Profit before tax per draft consolidated accounts 314.1
Less dividends received from Mshiriki 11.0
303.1
Add 25% share of associated undertaking’s profit 925% of 265.3) 66.3
369.4
Amended profit before tax
Tax per consolidated accounts 146.0

Add 25% of Mshiriki 26.0
172.0
Amended profit after tax 197.4
Retained profit in the associate for the year would be: Sh.m
(66.3 – 26 – 11) 29.3
ii) Calculate the carrying value of the investment Mshiriki if it is treated as an associated
undertaking.
Sh.m
25% of Ugsh. 4,431m at Ugsh. 8 to sh. 138.5
Workings
1. Goodwill to be eliminated on Fedha Inc acquisition

Tsh.m Sh.m
Cost 12
Less: Share of net assets acquired
Share capital 20
Profit and loss account 25
45
Translated at Sh. 2 x 40% 9
Goodwill 3
2. Translation of Fedha Inc balance sheet at 31 December 2001
Fedha Exchange Sh.m
Tsh.m rate
Non-Current Assets
Tangible assets 458 2.0 229.0
Current assets
Stocks 44 1.6 27.5
Cash 113 1.5 75.3
Current liabilities
Creditors 31 1.5 20.7
Loan 103 1.5 68.7
481 242.4
Share capital 20 2.0 10.0
Pre-acquisition profit 25 2.0 12.5
Post-acquisition profit 436 Balance 219.9
481 242.4
3. Group reserves at 31 December 2001 Sh.m

Wakili Ltd 367.0
Fedha Inc. (40% of 219.9) 88.0
455.0
Less goodwill 3.0
452.0
4. Translation of the profit and loss account of Fedha for the year ended 31 December 2001.
The profit and loss accounts for the year ended 31 December 2001 are as follows:

Fedha Rate Sh.m Sh.m

Tsh.m
Turnover 1,150 1.7 676.5 676.5
Opening stock 57 2.0 28.5
Purchases 762 1.7 448.2
Closing stock (44) 1.6 (27.5)
Cost of sales 775 ____ 449.2
Gross profit 375 227.3
Distribution cost 90 1.7 (53.0)
Administrative expenses 30 1.7 (17.7)
Depreciation 24 2.0 (12.0)
Total Operating Expenses (82.7)
Exchange differences (Losses) ______ (6.5)
89.2
Profit before tax 231 138.1
Tax 90 1.7 53.0
Profit after tax 141 85.1
Dividends paid 31.7. 2001 51 1.7 30.0
Retained profit 90 55.1
Profit and loss a/c b/f (W5) 346 164.8
Profit and loss a/c c/f (W2) 436 219.9
5 a) Calculating net asset/liabilities at 31 December 2000 in Tsh.

Tshm.
Share capital 20
Pre-acquisition profit 25
Post-acquisition profit (436 – 90) 346
391
Less: Non current assets (458 + 24) 482
Stock 57 539
Net monetary liabilities 148
b) Calculate the opening post-acquisition profit and loss account balance

Tsh.m Rate Sh.m
Fixed assets 482 2.0 241.0
Stock 57 2.0 28.5
Net monetary liabilities (148) 1.8 (82.2)
187.3
Less:
Share capital 20 2.0 (10.0)
Pre-acquisition profit 25 2.0 (12.5)
Post-acquisition profit (436 – 90) 346 164.8
6. Group reserves at 31 December 2000
Wakili (367 – 58) 309.0
Fedha Inc ( 40% of 164.8) 65.9
374.9
Less goodwill 3.0
371.9
7. Exchange difference carried to profit and loss account

On opening net monetary liabilities of Tsh. 148m
Translated at Tsh./Ksh. 1.5 exchange rate at 31.12.2001 (98.7)
Translated at Tsh./Ksh. 1.8 exchange rate at 31.12.2000 82.2

(16.5)
On profit and loss items expressed as average rate
Tsh.m
Balance retained 90.0
Stock change 13.0
Depreciation 24.0
127.0
Translated at Tsh./Ksh. 1.5 rate at 31.12. 2001 84.7
Translated at Tsh./Ksh. 1.7 rate at average (74.7) 10.0
Exchange loss (6.5)
QUESTION TWO
a) Earnings per share (EPS) is one of the most frequently quoted statistics in financial analysis.
Because of the widespread use of the price earnings (P/E) ratio as a yardstick for investment
decisions, it became increasingly important.
It seems that reported and forecast EPS can, through the P/E ratio, have a significant effect
on a company’s share price. Thus, a share price might fall if it looks as if EPS is going to be
low. EPS can depend on many often subjective, assumptions used in preparing a historical
statement, namely the profit and loss account. It does not necessarily bear any relation to
the value of a company and of its shares. Nevertheless, the market is sensitive to EPS.
EPS has also served as a means of assessing the stewardship and management role
performed by company directors and managers. Remuneration packages might be linked to
EPS growth, thereby increasing the pressure on management to improve EPS. The danger
of this, however is that management effort goes into distorting results to produce a
favorable EPS.
b) Kisima Ltd
Earnings per share for the year ended 30 June 2000
Shs. Shs.
Earnings 460,000
Number of shares
In issue for full year 800,000
In issue 1.7 x 3 – 30.9 x 3
200,000 x 3/12 x 60% 30,000
In issue 1.10 x 3 – 30.6 x 4
200,000 x 9/12 x 100% 150,000
180,000
980,000
Earnings per share = 460,000 = Sh. 46.9
980,000
c) i) Theoretical ex rights price per share
Sh.m
Value of 4 shares before rights issue (4 x 1.90) 760
Value of 1 rights issue share 130
Value of 5 shares after rights issue 890
Theoretical ex rights price 8.90 = 1.78

5
Adjustment factor

Sh 190 = 1.067
Sh.178
Shs. Shs.
Earnings 1,310,000
Number of shares in issue
1.7 x 4 – 28.2 x 5
711,610
1,000,000 x 8 1.067
12
1.3 x 5 – 30.6 x 5
1,250,000 x 4/12 416,667
1,128,277
EPS 1,310,000 = Sh. 116.1
1,128,277
Revised EPS calculation for 20 x 4
46.9 = Sh. 43
1.067
Kisima Ltd
Earnings per share for the year ended 30 June
2001 2000
Sh. 116.1 Sh. 43.9
d) Current year
Shs. Shs.
Earnings 1,520,000
Number of shares
As at 1 July 2001 1,250,000
2 Kisima for 1 Mawele x2 2,500,000
EPS = 1,520,000 = Sh. 60.80

2,500,000
Note: We are told in the QUESTION that the principles of merger accounting have been
adopted. This means that the shares in issue at the end of the year are assumed to
have been an issue for the whole of the year. There is therefore no need to time
apportion as we had to with the rights issue. The previous year’s EPS figure will
have to be adjusted to reflect the number of shares deemed to have been in issue in
that year, i.e. twice as many as were in fact in issue.
Previous year
EPS = Sh. 116.1 x ½ = Sh. 58.05
Mawele Ltd
Earnings per share for the year ended 30 June
2002 2001
Sh. 60.80 Sh. 58.05
QUESTION THREE
a) i) Nil provision
The ‘nil provision’ or ‘flow through’ method is based on the principle that only the tax
payable in respect of a period should be charged in that period. No provision for
deferred tax is made.
Nil provision is straight forward and objective. Its supporters have argued that the
taxation liability arises from taxable profits rather than form accounting profits.
Whether or not timing differences reverse depends on future transactions and future
profits. Some accountancy argue that nil provision takes account of tax planning (i.e the
extent to which the company can manage the amount and timing of income and
expenditure).
However, nil provision can result in large fluctuations in the tax charge. For this reason,
it has been consistently rejected by standard setters.
ii) Full provision

The ‘full provision’ method is based on the principle that financial statements for a
period should recognize the tax effects, whether current or deferred, of all transactions
occurring in that period.
Advantages of the full provision method
• It is straightforward to apply and objective.
• It has the effect of smoothing out distortions in the tax charge caused by timing
differences. This means that it may provide more useful information for users of
the financial statements because it is easier to make comparisons.
• Full provision matches the tax liability against the revenue to which it relates.
• Deferred tax is like adjustment reflecting the change in value of an entity’s assets
and liabilities arising from its tax position. For example, claiming accelerated capital
allowances on non current asset means that the asset is worth less than another
asset that is still fully tax-deductible. This change in value should be recognized.
Disadvantages of the full provision method

• It may lead to the build up of large balances which never crystallize. These may
distort key performance measures. Note: crystallization refers to the changing of a
provision (for deferred tax) into a liability (for corporation tax).
• It could be argued that full provision is inconsistent with the Conceptional
Framework. (because a liability is an obligation to transfer benefits).
iii) Partial provision

The ‘partial provision’ basis requires that deferred tax should be accounted for in
respect of the net amount by which it is probable that any payment of tax will be
temporarily deferred or accelerated by the operation of timing differences which will
reverse in the foreseeable future without being replaced.
Advantages of partial division

• It recognizes that, if an enterprise is not expected to reduce the scale of its
operations significantly, it will sometimes have what amounts to a hard core of
timing differences, so that the payment of some tax will be permanently deferred or
accelerated.
• It may provide information, which has predictive value (because it reflects the
mounts that the entity is likely to pay in practice).

Disadvantages of partial division

• It takes account of the tax consequences of future transactions, but not the
themselves. This has the effect that credit is taken in the current period for tax
relief expected to be available in respect of fixed assets that have not yet been
recognized in the financial statements. This contravenes the accruals concept.
• It takes into future transactions to which the reporting entity is not yet committed.
This is inconsistent with the historical cost concept that items should only be
recognized where they arise from past transactions or commitments.
• It relies on forecasts of future expenditure and is therefore time consuming and
subjective to apply.
a) Year Accumulated timing Tax rate Provision required

differences
Sh ‘000’ Sh ‘000’
2001 750 30% 225
2002 750 + 200 = 950 30% 285
2003 950 + 150 = 1,100 30% 330
2004 1,100 – 570 = 530 30% 159
The charge on credit in the profit and loss account for deferred tax is the balancing
figure required to reach the closing required provision from the opening provision.
Year Charge/(credit) required

Sh ‘000’
2001 225
2002 285 – 225 = 60
2003 330 - 285 = 45
2004 159 - 330 = (171)
Alternatively, the profit and loss account charge on credit each year can be calculated by
applying the tax rate to the timing difference arising in the year for 2002 to 2004.
a) Under the partial provision basis, one must look into the future and decide what net
reversing timing differences on a LIFO basis as follows:
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

With 2003 150 leaving 570 – 150 = 420
With 2002 200 leaving 420 – 200 = 220
With 2001 220
Therefore in 2001 a provision of Sh. 220,000 x 30% must be made.

This matching may be calculated using a table of cumulative timing difference:
Year Timing differences Forecast cumulative differences
20x5 20x6 20x7
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
2002 200 200 - -
2003 150 350 150 -
2004 (570) (220) (420) (570)
2001 net originating - - -
The largest negative figure in each column shows the anticipated reversal of timing
differences for each year and so the amount on which the deferred tax balance for the
year is based.
Year ended Deferred tax balance

31 December Sh ‘000’
2001 220 x 30% = 66
2002 420 x 30% = 126
2003 570 x 30% = 171
2004 0 x 30% = -
The profit and loss account charge is found by the movement on the deferred tax
account.
Year to 31 December Profit and loss account charge/(credit)
Sh ‘000’
2001 66
2002 60
2003 45
2004 (171)
Tutorial Note
Candidates should note that Partial Provision method is no longer provided for under current
IAS 12 ‘Income taxes.’ In practical application only full provision should be used.
QUESTION FOUR
a) i) In attempting to assess the likely future performance of an enterprise in terms of its
earnings and cash flow there can be very little other information that is more important
than knowing which parts of the business will continue and those which have ceased
operations or been sold. Because of the importance of this information the IASC have
been particularly detailed in their definition and treatment of discontinued operations.
A discontinued operation is a relatively large component of an enterprise that pursuant
to a single co-ordinated plan;
- Is being disposed of (by whatever method) in its entirety, being sold off on a
piecemeal basis or terminated through abandonment; and both;
- Represents a separate major line of business (in terms of a product line or
geographical operation); and
- Can be distinguished operationally and for reporting purposes.
An important aspect of the above is that there is an intention to dispose of the entirety
of the operation even if it is not in a single transaction and the ‘plan’ should be formal
detailed and have been announced.
Financial statements for periods after the initial reporting of a discontinuation should
basically update relevant information on the discontinuance until it is finally completed.
Comparative information for prior periods should be restated to show continuing and
discontinuing information consistent with the current year’s classification such that
there is comparability for the purpose of trend analysis.
The IASC intends that discontinued operations that meet the definition in the Standard
should be relatively infrequent and gives examples of activities that do not necessarily
satisfy the criteria:
A gradual phasing out of a product line;
Discontinuing a product(s) within an ongoing line of business;

Re-location of production;
Closing a facility to achieve productivity improvements;
The sale of a subsidiary whose activities are similar to those of other members of
the group.
Therefore changing the location, scale, product mix or manner of production of an operation
does not in itself constitute a discontinuation.
ii) The actual information to be disclosed a discontinued operation is summarized as follows:
a description of the discontinued operation;

its geographical reported segment (re IAS 14);
period in which it is expected to be completed;
the carrying amounts of the total assets and liabilities to be disposed of;
the operating results down to profit after tax;
details of the cash flows attributable to the discontinued operation.
(b) (i) Income statement – ABC

Sh.
Year to 31 March 2002 Year to 31 March 2001
Continuing
Previous Newly Acquired Discontinued Total Continuing Discontinued Total

Sales Revenue
610 70 70 750 460 260 720
Cost of Sales
(287) (49) (84) (420) (204) (244) (448)
Gross P. 323 21 (14) 330 256 16 272
Operating
expenses (56) (12) (12) (80) (42) (30) (72)
Profit before
tax 267 _9 (26) 250 214 (14) 200
Note on the above figures:

The figures for the acquisitions and discontinuing operations for the year to 31 March 2001 are
derived from the information in the QUESTION and have been deducted from the amounts in
the ‘total’ column to give the ‘continuing’ figures. The comparative figures are, in total, the same
as reported in the previous year, but the analysis of them has changed. To make the ‘continuing’
figures more comparable between the two periods, last year’s ‘acquisitions’ figures are included
as part of the continuing figures and last year’s results for the operations that have been
discontinued in the current period (the Food processing division) have to be shown under the
discontinuing heading.
QUESTION FIVE
a) The main disadvantage of historic cost accounts for assessing the performance of a business
is that they do not take into account the current values of assets and, to a lesser extent,
liabilities. This can give misleading information when either specific or general price
inflation levels are considered to be high. The effect is that many of the values of assets on
the balance sheet are understated, and partly because of related depreciation, profits tend to
be overstated. More detailed criticisms of historic cost accounts during a period of rising
prices are:
Effect on the balance sheet

i) Most non current assets can be considerably understated in terms of their current worth.
Examples of assets include land and buildings.
ii) In general net current assets tend not to be affected by inflation mainly because they are
monetary in nature. The possible exception is trading stock which is non-monetary.
iii) Traditionally liabilities are ignored when current values are discussed because they are
monetary in nature. Example there may be an error because a long-term loan carrying a
fixed rate of interest may have a current value that is considerably different to when it was
taken out. This is because current interest rates may have changed, often as a reaction to
levels of inflation since the loan was originally taken out.
iv) The balance sheet equation dictates that if the net assets are understated, the
shareholders’ funds will be understated.
Effects on the profit and loss account:

Some expenses tend to be understated in terms of their current value and this causes the profit
to be overstated. Some accountants argue that historical cost profits are made up of a current
operating profit plus inflationary gains relating to costs that have been consumed. The main
items of cost affected tend to be:
- costs of goods sold (both purchased and manufactured.) This can be mitigated by
the use of LIFO but this is not common practice and not allowed by IAS2
- depreciation charges on non current assets. In historic cost accounts these are based
on historical values rather than current values, and therefore understate the values of
the assets that have been used (consumed) during the period.
- some methods of accounting for inflation include monetary working capital and/or
‘gearing’ adjustments to historic cost profits. These are intended to reflect the
inflation effects of holding net monetary working capital and debt.
The above combined effects lead to the following criticisms and limitations of the use
of historic cost accounts to assess a business’s performance:
Lack of comparability:
It may be invalid to compare the results of two companies. One company may have assets that
are relatively old (and of lower cost) whereas another company may have similar, but more
recently purchased (and of higher cost) assets. In effect such companies would have a similar
operating divisions with similar characteristics to the above scenario. Management may assess
their relative performance using historical costs (which would be an invalid basis) to make
decisions relating to future investment or even closure.
Conceptual inconsistency
Accountants sometimes argue that historic cost accounts are not internally consistent because
they are in fact ‘mixed value’ accounts. This means that some historical costs are at current
values, whereas other historical costs are at out-of-date values. Thus current values of sales
figures are being matched with out-of-date values such as depreciation relating to older assets.
Many important ratios which are calculated as a basis for interpreting and assessing company
performance can be distorted by inflation. Important examples are return on capital employed,
profit margins, many asset turnover ratios, gearing levels and earnings per share.
The misleading effects of the above on different users may be:

Investors may find it is difficult to compare the results of different companies as a basis for
investment decisions. A shareholder may be tempted to accept a low bid for his/her shares if
weight is given to the asset backing (based on book values) of the shares. Dividends may seem
low in relation to reported profits, because management is recommending dividends based on a
current operating profit.
The Government taxes adjusted (but not for inflation) historical cost profits which means
companies pay tax based on higher inflation boosted profits.
b) The advantages and criticisms of Current Purchasing Power and Current Cost
Accounting are set out below:
Current Purchasing Power (CPP) Accounts

Like historic cost accounts CPP accounts are transactions based and are therefore objective and
verifiable. This is because they are a restatement of historic cost accounts (which possess the
above qualities) adjusted for the movement in the Government published Retail Price Index
(RPI).
Because the profit and loss account and the balance sheet are adjusted for price movements over
time, CPP accounts are said to be comparable between companies and over time. This
overcomes many of the difficulties of historic cost accounts.
As the index used to adjust the historical cost accounts is a consumer based index (the RPI) then
CPP accounts are more relevant to shareholders because this index is well understood by them
and more appropriate to their spending patterns. The figure for shareholders funds is said to be
a measure of the spending power (or consumption) that is being foregone in making (or holding)
the investment in the company and can be judged in those terms.
Opponents of CPP accounting argue that many of the claimed advantages may not be true. CPP
accounts have the following disadvantages:
i) CPP values are not real values, current or otherwise they are the result of statistical
calculations. For many companies the CPP values of their non current assets will
only be similar to their real (current) values if the movement of the specific price
indexes relating to those assets is similar to that of RPI. An extreme case of this
problem would occur where there was retail price inflation, but the company trades
in an activity where the prices of the goods they manufacture and supply are falling.
Hi-fi video and computer equipment may be examples of this. Average measures
of inflation, particularly if they are measures of consumer inflation, are not usually
appropriate to account for specific price inflation experienced by companies which
differs from company to company.
ii) Most items in the profit and loss account are adjusted by the average inflation factor
for the period. During periods of inflation this is greater than one and can give the
general effect of increased profits. Although this effect is mitigated by higher
depreciation charges, CPP profits for profitable companies can be higher than their
historic cost profits. A major criticism of historic cost accounts is that they
overstate operating profits. CPP accounts can worsen this problem rather than
solve it. Highly geared companies tend to show even greater CPP profits (due to
gains on net monetary items) and such companies are more vulnerable when
inflation is high. This is because interest rates are often increased by Governments
in an attempt to control inflation. This has a detrimental effect on companies with
high variable rate borrowings.
Current Cost Accounting
Current cot accounting principles are more soundly based and therefore more difficult to
criticize than CPP accounts. They correct most the limitations (due to increased price changes)
of historic cost accounts. They reflect the current values [which is not necessarily the current
costs] of a company’s specific assets. The reported current operating profit is considered to be
more relevant to many decisions such as dividend distribution, employee wage claims and even
as a basis for taxation.
The problem of CCA lie in their preparation and understanding. In practical terms it can be
very difficult to determine the current value of assets, and many ‘alternative’ forms of current
value e.g. replacement cost realizable and value in use. Methods of determining current costs
include the use of manufacturers’ price lists for plant and stock professional revaluation of assets
(e.g land and buildings) and the use of specific price indexes published by government agencies.
Whatever method is used it is often subjective and sometimes complex. This makes the cost of
the preparation and audit of current cost accounts expensive.
The Efficient Market Hypothesis would suggest that if CCA provided new information market
prices would react but in most cased the share prices do not reflect the use of CCA. Thus many
accountants felt that the expensive production of CCA gives no benefit to users. This perhaps
explains why historic cost accounts are still dominant in financial reporting.

PAPER TWO
QUESTION ONE
M Ltd and its subsidiary
Group Balance Sheet as at 31 December 2001
Non Current Assets Sh ‘000’ Sh. ‘000’

Property, plant & equipment 432,800
Goodwill: At cost 25,950
Investment in Associate company 28,800
482,360
Current Assets 407,700
Total Assets 895,250
Financed by:
Ordinary shares of Sh.10 each 300,000
General Reserve 50,000
Shareholders funds 506,160
Minority interest 130,700
6% Debentures 15,000
651,860
Current Liabilities
Creditors (207,300)
Debenture interest (900)
Dividends payable (30,000) 238,200
895,250
Workings
Group Non Current Assets (PPE)
Sh ‘000’ Sh ‘000’
M: 250,000 Provision adj. M. 60,000
H: 270,000 H 130,000
C: 200,000 C 40,000
Depn. Adj. 800 UPFA 8,000
Bal c/d 432,800
670,800 670,800
Analysis of equity: Current Assets________________

Sh ‘000’ Sh ‘000’
H: C: M: 145,500 UPCS 1,200
M: Direct 75 60 H: 143,400
Indirect - - C 120,000 Bal c/d 407,700
MI: Direct 25 20 408,900 408,900
Indirect - 20
100% 100%
Goodwill in Associates: Investment in Associates
Sh ‘000’ Sh ‘000’ Sh ‘000’

Investment: Cost 26,100 Investment at cost 26,100
OSC: 60,000 Add: post acquisition Reserve 2,700
General Reserve 6,000 28,800
P&L 21,000 Less: Goodwill amortized -__
87,000 28,800
Group share 30% x 87,000 26,100
-
Cost of Control
Sh ‘000’ Sh ‘000’
M: Inv in H (OSC): 165,000 Ordinary Share Capital (H) 75,000

PSC: 600,000 Preference Share Capital (H) 60,000
H: Inv in C (OSC): 765,000 General Reserve 30,000
Profit & Loss (H) 21,000
Ordinary Share Capital (c) 48,000
Gen. Reserve (c) 24,000
P&L (c) 9,600
Preaqc.c/w 7,950
Goodwill c/d 25,950
1,530,000 1,530,000
Profit and Loss A/C
Sh. ‘000’ Sh. ‘000’

Pre-acquisition dividend 7,950 M: 98,500
UPCS 1,200 H: 12,300
UPFA 6,000 C: 50,400
Associate A: 2,700
Divs. Receivable 11,700
Debenture Interest 300
Bal c/d 161,350 Dep’n. Adj. ___600
176,500 176,500
UPCS: ‘000’
Cost 80% 4,500
TC 20% 1,200

SP 100% 6,000
Minority Interest
Sh. ‘000’ Sh. ‘000’

MI: Invet. In C(osc) 25,500 OSC (H) 25,000
OPFA 2,000 PSC (H) 20,000
Gen. Reserve (H) 10,000
P&L 11,100
OSC (c) 32,000
Gen R (c) 16,000
P&L 40,000
Bal c/d 130,700 Divs. Receivable 3,900
Depn. adjust 200
158,200 158,200
QUESTION TWO
a) i) Experience Adjustments:
These are adjustments to pension costs arising from the difference between the
previous actuarial assumptions as to the future events and what actually occurred.
ii) Accrued benefits valuation methods:

These are actuarial valuation methods that reflect benefits based on the services
rendered by employees to the date of valuation. Such valuation methods may
incorporate assumption regarding projected salary levels to the date of retirement.
iii) Current Service Cost:

Is the increase in the PV of a defined benefit obligation resulting from the employees
services in the current period.
iv) Vested employee benefits:

Are benefits not conditional on future employment.
b) Annual PEL account charge:

Sh (m)
Regular Cost 10
Variation from regular cost [ 3 x 30] 9
10 19
Year Normal To P&L Balance

Contribution Sheet
Prepayment
2002 40,000,000 19,000,000 21,000,000
2003 40,000,000 19,000,000 42,000,000
2004 40,000,000 19,000,000 63,000,000
2005 10,000,000 19,000,000 54,000,000
2006 10,000,000 19,000,000 45,000,000
2007 10,000,000 19,000,000 36,000,000
2008 10,000,000 19,000,000 27,000,000
2009 10,000,000 19,000,000 18,000,000
2010 10,000,000 19,000,000 9,000,000
2011 10,000,000 19,000,000 -___
190,000,000 190,000,000 _________
b) Year Funding To P&L Accrual
2002 - 24,000,000 (24,000,000)

2003 - 24,000,000 (48,000,000)
2004 30,000,000 24,000,000 (42,000,000)
2005 30,000,000 24,000,000 (36,000,000)
2006 30,000,000 24,000,000 (30,000,000)
2007 30,000,000 24,000,000 (24,000,000)
2008 30,000,000 24,000,000 (18,000,000)
2009 30,000,000 24,000,000 (12,000,000)
2010 30,000,000 24,000,000 (6,000,000)
2011 30,000,000 24,000,000 -
QUESTION THREE
a) Segmental report for the year ended 31 December 2001
CLASSES OF BUSINESS
Stationery Tissue Packaging Other Group

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
Turnover
Total sales 12,986 22,048 5,200 3,290 43,524
After-segment sales (1,227) (3,658) - - (4,885)
Sales to third parties 11,759 18,390 5,200 3,290 38, 369
Profit before taxation
Segment profit 2,442 5,916 821 (201) 8,978
Common costs 5,004
Group operating profit 3,974
Net sales
Segment net assets 31,750 44,620 17,775 94,145

GEOGRAPHICAL SEGMENTS
Kenya Uganda Other areas Unallocated Group

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh.‘000’
Turnover
Total sales 30,630 9,344 1,481 3,290 44,745
Inter-segment sales 2,430 (2,117) - - (4,547)
Sales to third parties 28,200 7,227 1,481 3,290 40,198
Profit before taxation
Segment profit 4,873 3,127 487 (440) 8,047
Common costs (4,073)
Group operating profit 3,974
Net assets
Segmental net assets 41,820 30,600 21,660 94,080
(b)(i) Non trading items: The profitability analysis provides information only at the
operating profit level. It might be important to know the allocation (if it is feasible to
provide it) of such non-operating items as share of income of associated companies,
interest expense and taxation.
(ii) Unallocated items: The proportion of unallocated expenses is very high in relation
to the total and an analysis should be provided of this. The value of segmental
information is very much reduced if unallocated items compromise too large a
proportion.
(iii) Definition of business segments: The exact definition of market segments and the
activities they cover are not self-evident to users of the accounts. Consequently, a
short description of the activities concerned and clear definitions should be provided.
(iv) Geographical segments: It is not clear whether the geographical segments reflect
the source of the activity or its ultimate location. For example, the level of inter-
segment transfers in the USA might suggest that the profit may have been earned
primarily in a business segment located outside the USA.
c) A number of problems result from segmental reporting. These include:
1. The segmental information would be available not only to potential investors but
also to competitors, as financial statements are available to the public at large.
2. It may also be that information is costly and time-consuming for companies to
provide if it is not already available internally.
3. There would also be the problems in identifying reporting segments.
4. Judgments, probably subjective, would have to be made on disaggregating
information to segments. This may lead to reduced comparability between
companies.
QUESTION FOUR
a) Off-balance sheet financing arises when funds borrowed to finance operations in capital
project do not appear on an enterprise’s balance sheet. By minimizing the amount of
debt disclosed, an enterprise appears more secure than it really is because the debt-
equity ratio becomes understated. The understatement of debts in the balance sheet
enables an enterprise to obtain additional debt.
b) Pivot Ltd
Cash flow statement for the year ended 31 December 2001
Operating activities Sh. ‘000’ Sh. ‘000’

Income taxes paid (100)
Cash flow from Investing activities

Sale proceeds from Buildings 970
Net cash from investing activities 970
Financing activities
Proceeds from issue of shares 1,200
Payment of finance lease obligations (700)

Net increase in cash and cash equivalent 4,200
Cash and cash equivalents at 01.01.2001 500
Cash and cash equivalents at 31.12.2001 4,700
Reconciliation of profit for year and Cash from operations

Sh. ‘000’
Profit for year 732
Adjustments for:
Profit on disposal of non-current assets (470)
Depreciation charge 2,150
Corporation tax charged 300
Interest on Finance lease 403
Accruals and prepayments (30)
Operating profit before working capital changes 3,255
Increase in inventories (200)
Increase in trade payables (150)
Decrease in trade payables (25)
Workings:
Sh. ‘000’ Sh. ‘000’

Cash from customers:
Cash sales 3,500

Credit sales 5,750

9,250
Profit on Disposal on buildings

Cash from sale 970
Cost 5,000
Depn. (4,500) (500)
470
Paid to suppliers and employees

Wages 1,350
Suppliers 4,320
Other expenses 600
6,270
Accruals and prepayments:
Paid (other expenses) Shs. ‘000’ Sh. ‘000’

Insurance prepaid Bal b/f 150 Wages Bal b/f 75
Insurance prepaid Bal c/f 200 Bal c/f (95)
(50) 20
(30)
QUESTION FIVE
a) Impairment occurs because something has happened either to the Net assets themselves
or to the economic environment in which the fixed assets are operated. It is possible,
therefore, to rely in the use of indicators of impairment to determine when a review for
impairment is needed.
Examples of events and changes in circumstances that indicate an impairment may have
occurred include:
a) a current period operating loss in the business in which the fixed asset is involved or net
cash outflow from the operating activities of that business, combined with either past
operating losses or net cash outflows from such operating activities or an expectation of
continuing operating losses or net cash outflows from such operating activities.
b) a significant decline in a fixed asset’s market value during the period
c) Evidence of obsolescence or physical damage to the fixed asset.
d) a significant adverse change in:
- either the business or the market in which the fixed asset is involved, such as the
entrance of a major competitor;
- the statutory or other regulatory environment in which the business operates any
indicator of value’ (for example turnover) used to measure the fair value of a fixed
asset on acquisition.
e) A significant increase in market interest rates or other market rates of return that are
likely to affect materially the fixed asset’s recoverable amount.
The above indicators of impairment will trigger an impairment review only if they are
relevant to the measurements of fixed assets.
b) Disadvantages of replacement costing
Disadvantages of replacement costing may be summarized as follows:-
a) There are practical difficulties in estimating replacement costs, and there is

scope for different principles to be applied, as well scope for the subjective
judgement of valuers. If replacement costs are the estimated amounts that
would have to be paid to replace the asset ‘today’ but in fact there is no
intention on the part of the company to replace the asset, an estimate of the
replacement cost will be difficult unless:
• There is an identifiable market (as for property)or available suppliers’ list

prices.
The main problems relate to assets for which there is no identifiable market,
such as out-of-date equipment, or specially purpose-built premises (such as oil
refineries). These problems will be described in more detail in the later chapter
on current cost accounting.
b) There is difficulty of accepting that replacement costing should be applied to
assets which may not be replaced at the end of their life. If business income is
to be a measure of capital maintenance, then some form of current value must
be assigned to assets, even if they are either obsolete or unlikely to be replaced.
c) Some businesses operate with long-life plant and machinery and large stocks of
slow-moving inventory. Some companies even make their operating profit out
of holding stocks (as do wine merchants and whisky distillers). In such cases, it
is debatable whether holding gains are really gains of an operational
nature which should therefore be included as business income.
d) Replacement costing is weak in some areas where historical cost

accounting is strong. Two examples of these areas are:
(i) Assessment of the stewardship of the company by its management.

(ii) Verifiability of raw data by auditors.
It is perhaps partly for this reason that the accounting profession has tended
towards the view that accounting procedures in practice should remain based
on historical costs, with end of year adjustments made to turn the HCA profit
and loss account and balance sheet into current value equivalents.
There are practical difficulties of implementing Net Realisable value. The estimation of net
realizable values for stocks and work in progress and plant, machinery, fixtures and fittings and
so on, would be highly subjective.

PAPER THREE
QUESTION ONE
Tutorial Note:
The integral operations method (temporal method) should be used to translate the financial
statements of KSA Ltd since its operations are considered to be an integral part of the activities
of the reporting enterprise, J Ltd:
Workings
Depreciation Fr Rate Kshs
Buildings
2% x (240,000 – 40,000) 4,000 6 667
2% x 40,000 800 5 160
Plant
10% x 91,500 9,150 6 1,525
13,950 2,352
2
Buildings cost
1st January 2000 200,000 6 33,333
30th June 2003 _40,000 5 _8,000
240,000 41,333
Depreciation
1st January 2000 108,000 6 18,000
30th June 2003 ____800 5 ___160
108,800 18,160
3.
Translation of the draft income statement of KSA Ltd for the year ended 31st December 2003.
Fr Rate Kshs
Sales 840,000 5 168,000
Opening inventory 60,000 5.5 10,909
Purchases 320,000 5 64,000

Goods available for sale 380,000 74,909
Ending inventory (64,000) 4.5 (14,222)

Cost of sales 316,000 60,687
Gross profit 524,000 107,313
Expenses
(244,000 – 13,950) (230,050) 5 (46,010)
Depreciation (13,950) (W1) (2,352)
280,000 58,951
Taxation (109,000) 5 (21,800)
Profit after taxation 171,000 37,151
Dividend paid (50,000) W4 (10,417)
121,000 26,734
4. Dividend paid
6,250 ÷ 0.6 = 10,417
1. Translation of the draft Balance sheet of KSA Ltd for the year ended 31st December
2003
Fr Rate Kshs
Ordinary shares Fr 1 500,000 6 83,333
Accumulated profit
Pre-acquisition 60,000 6 10,000
Post-acquisition 179,200 Bal 29,784
Accounts payable 90,000 4.5 20,000
Taxation 109,000 4.5 _24,222
938,200 167,339
Land at cost 580,000 6 96,667

Buildings : cost 240,000 W3 41,333
Depreciation (108,800) W3 (18,160)
Plant : cost 91,500 6 15,250
Depreciation (38,500) 6 (6,417)
Inventory 64,000 4.5 14,222
Cash 24,000 4.5 5,333
Accounts receivable _86,000 4.5 19,111
938,200 167,339
2. Exchange difference
Post-acquisition profit b/forward
Translation of draft Balance sheet of KSA Ltd for the year ended 31st December 2002
Fr Rate Kshs
Ordinary shares Fr 1 500,000 6 83,333
Accumulated profit
Pre-acquisition 60,000 6 10,000
Post-acquisition 58,200 Bal 7,883
(179,200 – 121,000) _______ ______
618,200 101,216
Land at cost 580,000 6 96,667

Buildings : cost 200,000 6 33,333
Depreciation (104,000) 6 (17,333)
Plant : cost 91,500 6 15,250
Depreciation (29,350) 6 (4,892)
Inventory 60,000 5.5 10,909
Monetary items (179,950) 5.5 (32,718)
618,200 101,216

Kshs
Post-acquisition profit c/forward 29,784
Post-acquisition profit b/forward (7,883)
21,901
Post-acquisition profit for the year (26,734)
Exchange loss (4,833)
7. Goodwill arising on acquisition

Net assets acquired
60% x (83,333 + 10,000) 56,000
14,000
8. Minority interest
40% x (83,333 + 10,000 + 29,784) 49,247
J Ltd and its subsidiary

Consolidated income statement
Kshs
Sales 938,000
Opening inventory 30,909
Purchases 394,000
Goods available for sale 424,909
Ending inventory (92,222)
Cost of sales 332,687
Gross profit 605,313
Expenses (109,000 + 46,0101 + 2,352) (157,362)
Exchange loss (4,833)
Profit before taxation 443,118
Taxation (221,800)
221,318
Minority interest (12,927)
40% x (37,151 – 4,833) _______
Profit attributable to members 208,391
Dividends proposed (125,000)
50% x 250,000 _______
Retained profit brought forward
J Ltd 310,750
KSA Ltd: 60% x 7,833 ___4,730
398,871
J Ltd and its subsidiary

As at December 31st 2004
Non current assets Kshs Kshs
Land at cost 396,667
Buildings at cost 321,333
Accumulated depreciation (46,160) 275,173
Plant at cost 289,250
Accumulated depreciation (114,417) 174,833
Current assets
Inventory 92,222
Accounts receivable 222,111
Cash _89,333
403,666
Current liabilities
Dividends proposed 125,000
Taxation 224,222
566,222
Net current assets (162,556)
684,117
Ordinary shares of Kshs 1 250,000

Accumulated profit 398,871
Shareholder’s funds 648,871
Minority interest _49,247
*698,118
* Due to rounding error
QUESTION TWO
a.)
(i) Normal capacity: Production expected to be achieved on average under normal
circumstances
(ii) Fixed overheads: Indirect production costs that remain constant regardless of
production volume.
(iii) Variable overheads: Indirect production costs that vary nearly directly with the
volume of production
b.) Valuation of W and Y
W Y *Missing information:
Cost 5,000 6,400 KGS
Overheads: 5% x 2m: (100) W 1,000
Administration (500) Y 2,000
Storage (640) ____ Z 500
Adjusted cost 3,760 6,400
W Y
Sales: (900 x 8000) 7,200,000 24,000,000

(2,000 x 12,000)
Overhead: (2,000,000) (6,000,000)
Direct labour (1,000,000) (3,000,000)
Conversion (600,000) (330,000)
Transport (180,000) (400,000)
Selling & Distribution (4,500) (100,000)
Net expected value 3,415,500 1,417,000
PRODUCT Z
Selling price = Ratio [2:1]
[500 : 250 x 0.95 x 100] x 200 = 14,350,000

10
Less: Mixing costs (900)

Packaging (400)
Branding (180)
Storage (160)
Transport (50)
Selling & distribution (400)
12,485,000
PRODUCT:
COST NBV VALUATION

W 3,760,000 3,415,500 3,415,500
Y 6,400,000 14,170,000 6,400,000
Z 8,000,000 12,485,000 _8,000,000
17,815,500
QUESTION THREE
This is a sale and lease back transaction. The lease is an operating lease since there is no
indication that it is a finance lease. IAS 17 defines an operating lease as a lease other than a
finance lease:
(a) As per IAS 17.52, ‘of the sale price is above fair value, the excess over fair value should be
deferred and amortised over the period for which the asset is expected to be used.
Year 1 2 3 4 5
Sh.million Sh.million Sh.million Sh.million Sh.million
Profit on disposal 10
Deferred income 3 3 3 3 3
Lease rental expense (5) (5) (5) (5) (5)
Workings
1. Profit on disposal
Tutorial note: The profit on disposal will be limited to the fair value (value by reputable
buyer) of sh. 70 million
Sh.million
Proceeds 70
Carrying value (60)
10
2. Deferred income
Tutorial note: The deferred income is the excess of sale price of sh.88 million above fair
value of sh.70 recognised as income over the five year period.
(b) As per IAS 17.52, ‘…if the sale price is below fair value, any profit or loss should be
recognized immediately, except that if the loss is compensated by future lease payments at
below market price, it should be deferred and amortised in proportion to the lease payments
over the period for which the asset is expected to be used.
Year 1 2 3 4 5
Loss on disposal (2) (2) (2) (2) (2)
Lease rental expense (1.5) (1.5) (1.5) (1.5) (1.5)
Workings:
Sh.million
Proceeds 50
Carrying value (60)
Loss on disposal 10
Tutorial note: The loss on disposal is compensated by future lease payments of sh.1.5 million
which are below the market price. The loss should therefore be deferred.
(c) .
Year 1 2 3 4 5
Profit on disposal 25
Lease rental expense (5) (5) (5) (5) (5)
Sh.million
Proceeds 85
Carrying value (60)
25
The profit is to be recognized immediately. This is because despite the selling price being below
fair value there is a profit being recognized and not a loss.
QUESTION FOUR
(a) A cash generating unit is defined as a group of assets, liabilities and associated goodwill
that generates income that is largely independent of the reporting entity’s other income
streams. The assets and liabilities include those already involved in generating the
income and an appropriate portion of those used to generate more than one income
stream.

(b) IAS 36 Impairment of assets requires that there should be some indication of impairment
of non-current asset before an impairment review is carried out. However, IFRS 3
Business Combinations sets out different requirements for the special case of goodwill.
IFRS 3 states that goodwill resulting from a business combination should be recognized
in the balance sheet and measured at cost. Goodwill is not amortised. Instead, it should
be reviewed for impairment annually and written down to its recoverable amount where
necessary. Where goodwill is acquired in a business combination during the current
annual period, it should be tested for impairment before the end of the current annual
period. Prospects was acquired on 30 June 20x0, so the impairment review should be
carried out by 31 December 20x0.
(c) The value in use of the assets of Unit A is $72m, which is less than the carrying value of
$85m. There is therefore an impairment loss of $13m. This must be allocated as follows:
i) To any assets which have suffered obvious impairment. We are not given
any indication that there are any such assets here.
ii) To goodwill in the unit. We are not told that there is any.
iii) To other assets in the unit, i.e. the patents of $5 and tangible non-current
assets of $60m
iv) Therefore the $13m is written off in proportion against patents (5/65 x
$13m = $1m) and tangible non-current assets (60/65 x $13m = $12m)
(d) The goodwill consolidation is:

$ million
Net assets acquired 180
80
This goodwill cannot be allocated to individual units, so the impairment review must be
carried out in two stages.
Stage 1: Review individual units for impairment

It is clear that the assets of unit A have suffered impairment, since the value in use of $72m
is less than the carrying value of $85m. The assets of unit A must therefore be written down
to $72m.
Stage 2: Compare the adjusted carrying value of the net assets of Prospects,
including goodwill, with the value in use of the whole business.
$ million
Goodwill 80
Unit A 72
Unit B 55
Unit C _0
Total 267
The value in use of the whole business is $205m, so an additional impairment loss of $276m
- $205m = $ 62m must be provided for. This is allocated first to goodwill, reducing the
goodwill to $77m - $62m = $15m.
QUESTION FIVE
a)
i. There is a need to disclose the types of environmental issues relevant to the
business and its industry. These may include, but are not limited to:
• Environmental impact of an enterprises activities
• Measures undertaken to control and minimize the negative impact of an
enterprise on the environment
• Compliance or failure to comply with environmental regulations of a regulatory
or authoritative body
• Measures undertaken to contribute positively to the environment
• Provisions and recorded liabilities that have a relationship with the environment
• Environmental costs
• Environmental accounting policies
ii.
• Lack of appropriate measurement of performance which is acceptable. Environmental
accounting relates more to quality of life.
• Presently, environmental accounting is voluntary and unaudited. Firm’s may be
selective in the information to report
• Increased cost of providing accounting information has a negative effect on earning
ability of enterprises
• Environmental reporting and audit may require technical expertise beyond those of
the accountant.
b)
Herd of animals
Fair value movement schedule
Shs Shs
As at 1st January 2003 10 x Sh.1000 10,000
Additions during the year
Purchases 1 x Sh. 1,080 1,080
Increase in fair value due to price change

10 x (1,050 – 1,000) 500
1 x (1,110 – 1,080) 30
1 x (720 -700) 20 550
Due to physical change
10 x (1,200 – 1,050) 1,500
1 x (1,200 – 1,110) 90
1x 700 700
1 x (800 -720) 80 2,370
As at 31st December 2003 14,000
11 x 1,200 13,200
1 x 800 800

FA IV As at 23 March 2006

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FA IV As at 23 March 2006

Uploaded by

Copyright:

Available Formats

Financial Accounting IV

DISTANCE LEARNING CENTRE

P.O. Box 59857,

Tel: +254 (02) 606155

© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992

STRATHMORE UNIVERSITY ● REVISION KIT

PART I: INTRODUCTION .............................................................................................iv

APPROACH TO EXAMINATION ............................................................................ iv

TOPICAL GUIDE TO PAST PAPER QUESTIONS ............................................... viii

Part II: Past Papers Questions and Answers ..................................................................... 1

Questions – Past Papers ................................................................................................ 1

Answers – Past Papers ................................................................................................ 93

Part III: Comprehensive Mock Examinations............................................................... 271

Questions - Mocks .................................................................................................... 271

Answers – Mocks ..................................................................................................... 287

The following should be recommended guide.

STRATHMORE UNIVERSITY ● REVISION KIT

16.0 SPECIFIC OBJECTIVES

A candidate who passes this subject should be able to:

• explain the theory underlying financial accounting

16.1 The Theoretical Framework of Financial Accounting

- The theory of accounting in relation to measurement of income, capital and the

16.2 Accounting for Foreign Currency Transactions

- Treatment in the financial statements of individual companies

16.3 Valuation of Assets and Liabilities

STRATHMORE UNIVERSITY ● REVISION KIT

16.4 Accounting for Price Level Changes

- A critical appraisal of the Historical Cost Accounting approach

16.5 Specialised Financial Reporting

- The preparation and presentation of accounts and reports relating to

16.6 Contemporary Developments in Accounting Practice

a) Extensions of financial reports

- Value added statements

- Evaluation of current issues and controversies relating to financial reporting

c) Application of accounting research

TOPICAL GUIDE TO PAST PAPER QUESTIONS

QUESTION 1 Earnings Per Share

QUESTION 2 Consolidation (multiple group)

QUESTION 3 Referred Tax

QUESTION 4 Valuation of a firm

QUESTION 5 Segmental reports

QUESTION 1 Earnings per share

QUESTION 2 Business combination – vertical structure (Income Statement)

QUESTION 3 Income taxes

QUESTION 4 Share and business valuation

QUESTION 5 Segment reporting.

QUESTION 1 Consolidation Profit and Loss and Balance Sheet

QUESTION 2 Government grants

QUESTION 3 Government purchasing power

QUESTION 4 Capital reductions and re-organisation.

QUESTION 5 Property, plant and equipment and impairment.

QUESTION 1 Foreign Currency – Foreign entity

QUESTION 2 Related party

QUESTION 3 Income taxes

QUESTION 4 Foreign Currency (theory) and value added statement

QUESTION 5 Accounting for intangible assets

STRATHMORE UNIVERSITY ● REVISION KIT

QUESTION 1 Foreign Currency – Foreign entity

QUESTION 2 Group cash flow statement – Acquisition of subsidiary

QUESTION 3 Accounting for price level changes – C.P.P

QUESTION 4 Value added statement

QUESTION 5 Income taxes

QUESTION 1 Business combination – Mixed group structure