QUESTION ONE

Angus Ltd is expanding its manufacturing division and requires the use of specialised equipment.
An outright purchase of the equipment with a fair value of K250, 000 will be above their capital
budget. Their financial accountant suggests that they lease the equipment which has a four year
life over a three year lease term at a rate of 15% per annum. The lease payments are K53, 261.22
paid at the end of June and December each year. Show how this lease will be accounted for in the
statement of financial position and statement of profit or loss over the three years of the lease.

15 Marks

QUESTION TWO
The following trial balance has been extracted from the accounting records of Comrade plc at 31
March 2017, before the preparation of financial statements.

K’ 000 K’ 000
Sales Revenue 221,500
Cost of sales 14,556
Freehold land at 2010 revaluation 90,500
Buildings at cost 75,600
Buildings-Accumulated depreciation 45,360
Administrative expenses 15,400
Distribution expenses 11,200
Research and development 42,500
Inventories as at 31 March 2014 7,865
Interest 1,310
Retained earnings 23,457
Trade Receivables and payables 59,045 8,720
Bank 58,100
Treasury Bills 116,812
8% bank loan repayable 2016 26,200

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Corporation tax 2,300
Provision for liabilities as at 1 April 2016 62,500
Revaluation Reserve 25,000
Share capital (K 1 each) 70,370
Share premium 7,481
______ ______

402,888 402,888
The following information is also available
i. Research and development expenditure for the year to 31 March 2017 comprises the
following:

 K 15,000,000 spent on a joint project with a university investigating the potential use
of a certain chemical to reduce pollution levels in mine areas
 K 22,500,000 spent on developing a new high speed hard drive which, in the opinion
of Comrade Ltd, has an assured and profitable market. Work has been suspended
pending the development of a new glue suitable for the construction of the disk drives

 K 5,000,000 on the development of new computer software that will enable the
company to operate an Inventory control system that will greatly reduce the costs
associated with holding excessive amounts of inventory. Comrade Ltd expects the
system to come into operation on 1 June 2017.

ii. The inventories at the close of business on 31 March 2017 include inventory items that cost
K 4,480,000 but according to new information that has just been received, Comrade Ltd
will only be able to sell these inventory items for K 2,380,000 after incurring selling costs
of K280, 000.
iii. Buildings are depreciated at 25% on a reducing balance basis. The company uses the
revaluation model for its property, plant and equipment. After a review of the value of the
buildings at the year end, it was determined that they had a value of K30, 000, 000. The
buildings were used solely for rental purposes and capital appreciation for 8 months of the
year, after which they were used as offices for the company.

iv. Freehold land is considered to have an infinite useful life. Land is re-valued regularly in
accordance with the requirements of IAS 16 Property, Plant and Equipment. Comrade Ltd
acquired land for K 65,500,000 10 years ago. This land was revalued at K 90,500,000 on
31March 2010 and during 2017 land was re-valued at K 52,500,000 and.

v. Interest on the bank loan for the last six months of the year has not been included in the
trail balance
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 vi. Since April 2012 Comrade Ltd has been involved in a legal dispute with one of its
customers, Mesan Ltd for failure to supply goods on agreed time. Although the outcome
of the dispute is unknown, Comrade’s lawyer’s advice suggests that Comrade Ltd will have
to pay compensation to Mesan Ltd. At 31 March 2016 legal advice estimated that
compensation would amount to K 62,500,000. The case is due to be heard in June 2017
and at 31 March 2017 the most up to date legal advice suggested that Comrade Ltd will
instead have to pay compensation of around K 55,000,000.

vii. The corporation tax balance in the trial balance relates to an over provision in 2016.
Corporation tax for the year ended 31 March 2017 is estimated to be K 5,700,000.

Prepare the statement of profit or loss and other comprehensive income, statement of financial
position and statement of changes in equity for Comrade Plc for the year ended 31st March 2017.

25 Marks

QUESTION THREE
Scorpio Ltd prepares financial statements to 31 March each year. On 1st April 2014, the company
purchased equipment for K 80,400 with a useful economic life of 4 years. Scorpio Ltd depreciates
equipment on a straight line basis.

Scorpio Ltd’s financial statements show profit before tax of K120, 000 in 2014, K162, 000 in
2015, K102, 500 in 2016 and K160, 000 in 2017. This profit is stated after charging depreciation
of K 20, 100 per annum. The company does not have any other Non-Current Assets other than the
equipment purchased on 1 April 2014.

The tax allowances granted in relation to this asset by the Zambia Revenue Authority at 31 March
each year for the period 2014 to 2017 are:

Year 2014 K 24, 000

Year 2015 K 22, 300

Year 2016 K 21, 100

Year 2017 K 13, 000

Income tax is calculated as 35% of taxable profits

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Apart from the above depreciation and tax allowances there are no other differences between the
accounting and taxable profits.

Required:

i. Ignoring deferred tax, prepare the statement of profit or loss and other
comprehensive income extracts in for each of the years 2014, 2015, 2016 and 2017
10 marks

ii. Accounting for deferred tax, prepare the statement of profit or loss and other
comprehensive income and statement of Financial Position extracts for each of the
years 2014, 2015, 2016 and 2017 in accordance with the requirements of IAS 12
Income tax with an assumption that the tax charge for the pervious accounting year
is paid on 1st April the following year. 15 marks

END OF TEST