EPS

XYZ Limited had 400,000 shares in issue, until on 30th Sep 2002 it made a bonus issue of
100,000 shares. Calculate EPS for 2002 and the corresponding restated figure for 2001 if total
earnings were Rs 80000 in 2002 and EPS for 2001 was Rs 0.1875. Follow calendar from Jan to
Dec.
Required:

1. Basic EPS for 2002.

2. Restated Basic EPS for 2001

Farrah Co had a Basic EPS of $15 based on earnings of $150,000 and 10,000 ordinary equity
shares. It also had in issue 15% convertible debenture of $400,000 which is convertible in two
years’ time into 4 convertible shares for every $200 of debenture. Tax rate is 30%.
Required:

1. Check if potential equity shares are dilutive in nature.

2. Calculate Diluted EPS.

How does EPS get effected if bonus shares are issued?

A Ltd has 500,000 shares outstanding and has Rs 2,500,000 in net profits. Below are some of the
items of balance sheet:

1. 14% convertible loan stock of Rs 1,000,000 which is convertible in two years of time
in 2 shares for every Rs 25 of debenture held.
 2. 12% Convertible Preference Share of Rs 500,000 which is convertible in three years’
time into 5 shares for every Rs 100 of shares held.

Calculate Basic and Diluted EPS and also explain whether circumstances are dilutive in nature or
non-dilutive and why?

On 1 October 20X4, Hoy Co had $2.5 million of equity share capital (shares of 50 cents each) in
issue. No new shares were issued during the year ended 30 September 20X5, but on that date there
were outstanding share options which had an effect equivalent to issuing 1.2 million shares for no
consideration. Hoy's profit after tax for the year ended 30 September 20X5 was $1,550,000.
In accordance with IAS 33 Earnings Per Share, what is Hoy's EPS and Diluted Earnings Per Share for
the year ended 30 September 20X5?

Grants

1
A company receives a 20% grant towards the cost of a new item of machinery, which cost
$100,000. The machinery has an expected life of four years and a nil residual value. The expected
profits of the company, before accounting for depreciation on the new machine or the grant,
amount to $50,000 per annum in each year of the machinery's life. Show the necessary
accounting treatment under both the methods: (i) Reducing the cost of the asset (ii) Treating grant
as deferred income over the life of the asset in SOPL and SOFP.
2

Derringdo acquired an item of plant of a gross cost of $1000,000 on 1 October 20X2. The
plant has an estimated life of ten years with a residual value equal to 10% of its gross cost.
Derringdo uses straight-line depreciation on a time apportioned basis. The company received
a government grant of 30% of its cost price at the time of its purchase. The terms of the grant
are that if the company retains the asset for four years or more then no repayment liability
will be incurred. If the plant is sold within four years a repayment on a sliding scale would be
applicable. The repayment is 75% if sold within the first year of purchase and this amount
decreases by 25% per annum. Derringdo has no intention to sell the plant within the first four
years. Derringdo’s accounting policy for capital-based government grants is to treat them as
deferred credits and release them to income over the life of the asset to which they relate.

Required: Discuss whether the company’s policy for the treatment of government grants
meets the definition of a liability in the IASB’s conceptual Framework. Show the carrying
value of the asset and grant and charge to SOPL for 4 years.

On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to

equipment which cost $90,000 and had a useful life of six years. The grant was netted off
against the cost of the equipment. On 1 January 20X7, when the equipment had a carrying
amount of $50,000, its use was changed so that it was no longer being used in accordance
with the grant. This meant that the grant needed to be repaid in full but by 31 December
20X7, this had not yet been done.

How is the grant and asset required to be reflected in the financial statements of Gardenbugs
Co for the year ended 31 December 20X7?

4
Thorham purchased a new environmentally-friendly machine on 1 July 20X2 for $100,000.
The machine was installed at a cost of $50,000 and came into operation on 1 August 20X2.
The machine was eligible for a government grant of 30% of the purchase price of the asset
(excluding installation costs), which Thorham applied for on 1 July 20X2, meeting all the
relevant criteria. The machine has an estimated useful life of five years and a zero residual
value. The monies from the grant were received on 1 January 20X3.
Discuss the possible treatments of the above in the financial statements for the year ended 31
March 20X3 if
a) The grant is not refundable to the government.
b) The grant may have to be refunded if the environment friendly machine is sold within
3 years.

Borrowing cost

Change

During the year to 30 September 20X3 Hudson built a new mining facility to take advantage of
new laws regarding on-shore gas extraction. The construction of the facility cost $10 million, and
to fund this Hudson took out a $10 million 6% loan on 1 October 20X2, which will not be repaid
until 20X6. The 6% interest was paid on 30 September 20X3. Construction work began on 1
October 20X2, and the work was completed on 31 August 20X3. As not all the funds were
required immediately, Hudson invested $3 million of the loan in 4% bonds from 1 October 20X2
until 31 January 20X3. Mining commenced on 1 September 20X3 and is expected to continue for
10 years. As a condition of being allowed to construct the facility, Hudson is required by law to
dismantle it on 1 October 20Y3. Hudson estimated that this would cost a further $3 million. As
the equipment is extremely specialised, Hudson invested significant resources in recruiting and
training employees. Hudson spent $600,000 on this process in the year to 30 September 20X3,
believing it to be worthwhile as it anticipates that most employees will remain on the project for
the entire 10 year duration. Hudson has a cost of capital of 6%.
Required:
Show, using extracts, the correct financial reporting treatment for the above items in the financial
statements for Hudson for the year ended 30 September 20X3.

On 1 October 20X1, Bash Co borrowed $6m for a term of one year, exclusively to finance the
construction of a new piece of production equipment. The interest rate on the loan is 6%. The
construction commenced on 1 November 20X1 but no construction took place between 1
December 20X1 to 31 January 20X2 due to employees taking part in an industrial strike. The
asset was ready for use on 30 September 20X2 having a total construction cost of $16m.

The company also used funds from its existing borrowings to finance the construction

8% Loan from AD Bank of $ 25m

7% Loan from Scotia Bank of $ 30 m

What is the Borrowing cost capitalised along with cost of production equipment in Bash Co's
statement of financial position as at 30 September 20X2?

Grimtown took out a $10 million 6% loan on 1 January 20X1 exclusively to build a new football
stadium. Not all of the funds were immediately required so $2 million was invested in 3% bonds
until 30 June 20X1.
Construction of the stadium began on 1 February 20X1 and was completed on 31 December
20X1.
The total cost of the construction was 60 million which was financed by existing loans in place
which are as follows:
8% loan of $35m
7.5% loan of $40m
Calculate the amount of interest to be capitalised in respect of the football stadium as at 31
December 20X1

On 1 January 20X5, Sainsco began to construct a supermarket which had an estimated useful life
of 40 years. It purchased the site for $25 million. The construction of the building cost $9 million
and the fixtures and fittings cost $6 million. The construction of the supermarket was completed
on 30 September 20X5 and it was brought into use on 1 January 20X6.

Sainsco borrowed $40 million on 1 January 20X5 in order to finance this project. The loan
carried interest at 10% pa. It was repaid on 30 June 20X6.

Required: Calculate the total amount to be included at cost in property, plant and equipment in
respect of the development at 31 December 20X5.

Deferred tax
1

The original cost of an asset is $600,000. The asset has a 3-year life and no salvage value is
expected. For tax purposes, the asset is depreciated using an accelerated depreciation method with
tax return depreciation of $300,000 in year 1, $200,000 in year 2, and $100,000 in year 3. The
firm adopts straight-line method of depreciation in its income statements. Earnings before
interest, taxes, depreciation, and amortization (EBITDA) is $500,000 each year. The firm’s tax
rate is 40%. Calculate the firm’s income tax expense, and deferred tax liability for each year of
the asset’s life.

2
What do you understand by the term ‘Deferred Tax’
Gerald Ltd. revalued a property from a carrying value of $4 Million to its fair value of $6.2
million during the reporting period. The property cost $6.5 Million, and its tax base is $3.5
Million. The tax rate is 30%. Explain the deferred tax implications at the end of the reporting
period.

On 1 January 20X8 Simone Co decided to revalue its land for the first time. A qualified property
valuer reported that the market value of the land on that date was $80,000. The land was
originally purchased 6 years ago for $65,000.
The required provision for income tax for the year ended 31 December 20X8 is $19,400. The
difference between the carrying amounts of the net assets of Simone (including the revaluation of
the land above) and their (lower) tax base at 31 December 20X8 is $27,000. The opening balance
on the deferred tax account was $2,600. Simone’s rate of income tax is 25%.
Required:
Prepare extracts of the financial statements to show the effect of the above transactions.

A company’s financial statements show profit before tax of $1,000 in each of years 1, 2 and 3.
This profit is stated after charging depreciation of $200 per annum, due to the purchase of an
asset costing $600 in year 1 which is being depreciated over its 3-year useful life on a straight
line
basis.
The tax allowances granted for the asset are:
Year 1 $240
Year 2 $210
Year 3 $150
Income tax is calculated as 30% of taxable profits.
Apart from the above depreciation and tax allowances there are no other differences between the
accounting and taxable profits.
Required:
(a) Ignoring deferred tax, prepare statement of profit or loss extracts for each of years 1, 2 and 3.
(b) Accounting for deferred tax, prepare statement of profit or loss and statement of financial
position extracts for each of years 1, 2 and 3.

Provisions

Raycroft operates a nuclear power station. The power station is due to be decommissioned on
31 December 20X8 but will be fully operational up to that date. It has been estimated that the
cost of decommissioning the power station and cleaning up any environmental damage, as
required by legislation, will be $60 million. Raycroft recognised a provision for the present
value of this expenditure at 31 December 20X0. A suitable discount rate for evaluating costs
of this nature is 12%, equivalent to a present value factor after eight years of 0.404. The
decommissioning cost will be depreciated over eight years.

What is the total charge to profit or loss in respect of this provision for the year ended 31
December 20X1 and 20X2?

On 1 October 20X4, Kalatra Co commenced drilling for oil from an under sea oilfield.
Kalatra Co is required to dismantle the drilling equipment at the end of its five-year licence.
This has an estimated cost of $30m on 30 September 20X9. Kalatra Co's cost of capital is 8%
per annum and $1 in five years' time has a present value of 68 cents.

What is the provision which Kalatra Co would report in its statement of financial position as at 30
September 20X5 and 20X6 in respect of its oil operations?
3

On 1 October 20X7. Promoil acquired a newly constructed oil platform at a cost of $30
million together with the right to extract oil from an offshore oilfield under a government
license. The terms of the licence are that Promoil will have to remove the platform (which
will then have no value) and restore the sea bed to an environmentally satisfactory condition
in ten years’ time when the oil reserves have been exhausted. The estimated cost of this in ten
years’ time will be $ 15 million. The present value of $1 receivable in ten years at the
appropriate discount rate for Promoil of 8% is $0.46.

Required: Explain & quantify how the oil platform should be treated in the financial
statements of Promoil for the year ended 30 September 20X8 and 20X9.

The following two issues relate to Spiko Co's mining

Issue 1: Spiko Co began operating a new mine in January 20X3 under a five-year government licence
which required Spiko Co to landscape the area after mining ceased at an estimated cost of $100,000.

Issue 2: During 20X4, Spiko Co's mining activities caused environmental pollution on an adjoining
piece of government land. There is no legislation which requires Spiko Co to rectify this damage,
however, Spiko Co does have a published environmental policy which includes assurances that it will
do so. The estimated cost of the rectification is $1,000,000. Assume a cost of capital of 8%.

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the
following statements is correct (give reasons and quantify where necessary ) in respect of Spiko Co's
financial statements for the year ended 31 December 20X4?

1. A provision is required for the cost of both issues 1 and 2

2. Both issues 1 and 2 require disclosure only
3. A provision is required for the cost of issue 1 but issue 2 requires disclosure only
4. Issue 1 requires disclosure only and issue 2 should be ignored
Agriculture and others theory

Define provision as defined under IAS 37.

Discuss whether we accrue a provision in the following situations. If yes, also detail when
will the provision be accrued.

1) Restructuring by sale of an operation.

2) Restructuring by closure.

3) Warranty

4) Land contamination

5) Chain of stores self-insured for fire loss.

6) Self-insured restaurant, people were poisoned and lawsuits are expected.

7) Onerous contract.

Which of the following must exist for an operation to be classified as a discontinued

operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations?
(1) The operation represents a separate major line of business or geographical area
(2) The operation is a subsidiary
(3) The operation has been sold or is held for sale
(4) The operation is considered not to be capable of making a future profit following a period
of losses
Which of the following must apply for the sale to be considered highly probable?
(1) A buyer must have been located
(2) The asset must be marketed at a reasonable price
(3) Management must be committed to a plan to sell the asset
(4) The sale must be expected to take place within the next six months

Write a short note change in accounting policies and estimates and errors IAS 8

What are the fundamental and enhancing qualitative characteristics of financial statements
impairment

Reversal of impairment

B)IAS 36 Impairment of Assets contains a number of examples of internal and external events which
may indicate the impairment of an asset.

In accordance with IAS 36, which of the following would definitely NOT be an indicator of potential
impairment of an asset (or group of assets)?

a) An unexpected fall in the market value of one or more assets

b) Adverse changes in the economic performance of one or more assets
c) A significant change in the technological environment in which an asset is employed making
its software effectively obsolete
d) The carrying amount of an entity's net assets being below the entity's market capitalisation

C)What is the total impairment loss associated with Aphrodite Co's machine at 1 October 20X6?

A. Celine, a manufacturing company, purchases a property for $1 million on 1 January 2001 for
its investment potential. The land element of the cost is believed to be $400,000 and the buildings
element is expected to have a useful life of 50 years. At 31 December 2001, local property indices
suggest that the fair value of the property has risen to $ 1.1 million.
Required:
Show how the property would be presented in the financial statements as at 31 December 2001 if
Celine adopts:
a) Cost model b) Fair value model
 Kyle Co purchased an investment property some year ago and carries it under the fair value
model. At 1 January 20X1, the property had a fair value in Kyle Co's financial statements of $12
million. On 1 July 20X1 Kyle Co decided to move into the property and use it for its own
business. At this date the asset had a fair value of $14 million and a remaining useful life of 14
years. What amount should be recorded in Kyle Co's statement of profit or loss for the year ended
31 December 20X1?

A. An equipment bought by ABC Ltd. at a cost of $17000. It is expected to last for five years and
then be sold for scrap for $2000. Usage over the five years is expected to be: (10 Marks)
2001 200 Days
2002 100 Days
2003 100 Days
2004 150 Days
2005 40 Days
You are required to work out the depreciation to be charged each year under:

a. The straight-line method.

b. The reducing balance method (using a rate of 35%).
c. The machine hour method.

An entity purchases an aircraft that has an expected useful life of 20 years with no residual value.
The aircraft requires substantial overhaul at the end of years 5, 10 and 15. The aircraft cost $25
million and $5 million of this figure is estimated to be attributable to the economic benefits that
are restored by the overhauls. In year 6, the cost of the overhaul is estimated to be $6 million.
Calculate the annual depreciation charge for the years 1–5 and years 6–10.
CRV Co. took out a $20 million 6% loan on 1 January 2011 to build a cricket stadium. Not all of
the funds were immediately required so $4 million was invested in 3% bonds until 30 June 2011.
Construction of the stadium began on 1 February 2011 and was completed on 31 December 2011.
Calculate the amount of interest to be capitalised, finance cost and interest income in respect of
the cricket stadium as at 31 December 2011.