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HBA 2401 ADVANCED FINANCIAL REPORTING CAT
INSTRUCTIONS:
1. Answer all the questions and show all your workings.
2. Be neat
3. Write your students details well
QUESTION ONE
(a) Explain the following terms:
i. Qualifying Asset in relation to Borrowing Costs
ii. Interim Financial statement Tax Base
iii. Asset impairment
(b) Make journal entries to record the following share based purchased transaction
On 1 January 20 21 , EABL Ltd granted 200 shares to each of its 4 00 employees under two vesting
conditions:
• Service condition lasting three years, and
• Company’s share price must increase by at least 20% compared to the grant date after the
three-year period.
At the grant date, the fair value of the granted shares is estimated at Ksh. 6 0 each. This value does
not account for the three-year service condition, but it does consider the market vesting condition
relating to share price. EABL Ltd estimates that 90% of the 4 00 employees will fulfil the service
condition. To summarise:
• Total employees: 400
• Number of shares per employee: 200
• Fair value of shares at grant date (accounting for market vesting condition): Ksh. 60
• Duration of service condition: 3 years
• Estimated percentage of employees expected to meet the service condition: 90%
QUESTION TWO
ChamKenya (CK) Ltd is a famous clothing company with a 31December reporting date. The
financial director presented you with the following information:
DELIVERY VEHICLE
CK lLtd bought a delivery vehicle on 1 july 2016 for use in manufacturing department. The cost of
the delivery vehicle amounted to Ksh. 84,000. The company depreciates the delivery vehicle on
the straight line basis over 5 years with Ksh. 4,000 Residual Value. The kenya Revenue Authority
allow wear and tear at 25% per annum on the cost. On 31September 2018 the delivery vehicle was
involved in an accident and was written off. KRA allows for sccrapping allowance on the delivery
vehicle
MACHINERY
CK Ltd uses the machinery to cut the material according to design patterns. On 2 january 2016 the
machinery was erected at a total cost of Ksh. 450,000. The following significant components were
identified:
Components Cost Ksh Expected useful life Residual Values Cutting blade 170,000 500,000 patterns Nil Engine 280,000 150,000 hours Ksh. 80,
The components can function independently, but are used as a unit. The components are
independently replaced at the end of their useful life.
After two years the machinery had cut 13,000 patterns and worked for 26,000 hours. During 2018
the machinery cut 1,800 patterns and worked for 3,600 hours. On 31 December the total useful life
and residual value of the components were re-evaluated found as follows:
Components Cost Ksh Expected Useful Life Residual Values Cutting Blade 170,000 400,000 patterns Ksh. 5, Engine 280,000 150,000 hours Ksh. 70,
KRA allowed wear and tear at 25% per annum on the cost
LAND AND BUILDINGS
On 2 January 2016, CK Ltd bought a manufacturing building in industrial area Nairobi at a cost of
Ksh. 1,700,000 included Ksh. 500,000 for the land and the reminder for the building. The company
depreciates the building on a straight line basis over a 12 years with a residual value of Ksh. NIL.
KRA allows an industrial building allowance of 10% per annum on the cost.
ADDITIONAL INFORMATION
Ck Ltd’s statement of financial position reflected the following items
Allowance for doubtful debts (18,000) - Income received in advance - (15,000)
A list of doubtful debt was presented to KRA and an allowance of 25% of the doubtful debt was
granted. The tax rate has remained constant at 30% for the past three years. Ignore any Value Added
Tax implications.
The profit before tax for the year ended 31 December 2018 before accounting for any of the above
mentioned transactions and depreciation amounted to Ksh. 950,
REQUIRED:
a) Calculate the value of the carrying amount of the machinery and building
b) Calculate the deferred tax balance in the statement of financial position at 31 December
c) Calculate the profit before tax for the year ended 31 December 2018
d) Calculate the current tax for the year ended 31 December 201
QUESTION THREE
The following are the Trial Balances of Dragon Ltd and Grand Limited on 31 December 2018.
Dragon Ltd Dr/(Cr) Grand Ltd Dr/(Cr) Investment in Grand Ltd 72,000 Ordinary Shares 13,500 Preference Shares
Equipment at Cost 152,000 173, Investment in Grand Ltd : Loan 25,000 - Accounts Receivable 66,000 94, Inventory 60,00 52, Bank 30,000 - Transfer to capital Redemption reserve 10,000 5, Dividends paid
- Ordinary shares
- Preference Shares
Other expenses 31,000 17, Income Tax Expense 26,300 11, Cost of Sales 185,000 296, Share capital- Ksh.1.50 ordinary shares
- Ksh.2.00- 7% preference shares
Retained Earnings (11,300) (12,100) Capital Redemption Reserve (11,000) (10,000) Mark-to- market reserve (9,350) - Loan from Dragon Ltd - (25,000) Deferred tax (4,650) (3,000) Accounts Payable (26,800) (23,000) Bank Overdraft - (10,000) Accumulated Depreciation (37,000) (20,500) Revenue (270,000) (340,000) Profit on Sale of asset (10,600) - Other Income (Dividends Received included) (7,400) (5,
Additional information:
1) On 1 January 2012 Dragon Ltd purchased 48,000 ordinary shares of Grand Ltd for Ksh. 100,
when the retained earnings were Ksh. 6,000 and the capital redemption reserve was Ksh. 2,000.
The ordinary share capital of Grand Ltd has remained unchanged since acquisition.
2) On 01 January 2016, Dragon acquired 13,500 preference shares in Grand Ltd for Ksh. 25,800.
There were no arrear preference dividends at this date
3) The investments in Grand Ltd are classified as available for sale, and all fair value adjustments are
recognised in equity
4) At the acquisition date, the assets and liabilities were considered to be fairly valued in accordance
with IFRS 3
5) It is Dragon Ltd.’s policy to measure any non-controlling interest in an acquire at its proportionate
share of the acquiree’s identifiable net assets.
6) Since 1 January 2017, Dragon Ltd has been purchasing all its inventories from Grand Ltd at a profit
mark-up of 25% on the cost of good. These goods are inventories in the records of Grand Ltd. The
total sales from Grand Ltd to Dragon Ltd during the current reporting period amounted to Ksh.
225,000. At 1 January 2018 Dragon Ltd held Ksh. 12,000 inventory that was purchased from Grand
Ltd.
7) On 31 August 2018, Dragon Ltd sold equipment (non-current asset) to Grand Ltd at a profit of Ksh.
10,600. Grand is not a trader in equipment. No capital profit was made on the sale
8) Grand Ltd provides for depreciation on the straight line basis at a rate of 10% per annum with no
residual value.
9) Dragon Ltd has signed a guarantee for the bank overdraft of Grand Ltd
10) The tax rate remained unchanged at 30% from 1 January 2015.
REQURED: Prepare the following of Dragon Ltd and its subsidiary Grand Ltd for the year ended 31
December 2018
a) Consolidated statement of comprehensive income
b) Only the assets portion of the consolidated statement of financial position (Balance Sheet)
