ACCOUNTING FOR ASSETS AND LIABILITIES
QUESTION 1
April 2024 Question One A and D
a) The objective of International Accounting Standard (IAS) 2 – Inventories, is to prescribe the accounting treatment for inventories for various types of business organisations.
Required:
Summarise the key requirements of IAS 2 for manufacturing entity under the following headings:
- Scope of the term “inventories”. (2 marks)
- Measurement of inventories. (3 marks)
- Disclosure requirements. (3 marks)
(d) With reference to International Financial Reporting Standard (IFRS) 9 – Financial instruments, explain the requirement for derecognition of financial instruments.(3 marks)
QUESTION 2
April 2024 Question Two
(a) The following trial balance was extracted from the books of Kaleb Ltd. as at 31 March 2024:
| Sh.“000” | Sh.“000” | |
| Ordinary share capital | 475,00 | |
| Share premium | 95,000 | |
| Retained profit (1 April 2023) | 184,600 | |
| 8% loan note | 120,000 | |
| Revenue | 1,783,800 | |
| Cost of sales | 1,300,500 | |
| Distribution costs | 209,900 | |
| Administrative costs | 258,600 | |
| Inventory (31 March 2024) | 308,000 | |
| Trade receivables | 382,400 | |
| Trade payables | 388,300 | |
| Bank balance | 27,500 | |
| Deferred tax | 33,000 | |
| Property at cost (Land Sh.87 million) | 457,000 | |
| Plant and equipment at cost | 360,000 | |
| Motor vehicles at cost | 82,000 | |
| Fixtures and fittings at cost | 64,000 | |
| Accumulated depreciation (1 April 2023): | ||
| – Building | 162,800 | |
| – Plant and equipment | 119,400 | |
| – Motor vehicles | 41,000 | |
| – Fixtures and fittings | 25,600 | |
| Interest paid | 9,600 | |
| Suspense account | ________ | 42,000 |
| 3,465,000 | 3,465,000 |
Additional information:
- During the year ended 31 March 2024, the company sold of an item of plant with a carrying amount of Sh.46,200,000 for cash proceeds of Sh.42,000,000. The disposal proceeds were credited to the suspense account.
Plant and equipment is depreciated at the rate of 12.5% per annum on reducing balance basis. Full year depreciation is provided in the year of asset purchase and none in the year of disposal. Depreciation and any gain or loss on disposal of plant and equipment should be classified under the cost of sales.
- Depreciation on other non-current assets is provided and allocated as follows:
| Asset | Rate per annum (%) | Basis | Allocation |
| Building | 2 | Straight line | Administration |
| Motor vehicles | 25 | Straight line | Distribution |
| Fixtures and fittings | 10 | Straight line | Administration |
- The 8% loan note was issued on 1 April 2023 and will be redeemable in three years’ time at a substantial premium which gives an effective interest rate of 10% per annum.
- Tax provision for the year to 31 March 2024 was determined to be a tax credit estimated at Sh.15,700,000. In addition, at 31 March 2024, the tax bases of assets and liabilities exceeded their carrying amounts by Sh.121,000,000.
The income tax rate applicable to Kaleb Ltd. is 30%.
Required:
(i) Property, plant and equipment movement schedule for the year ended 31 March 2024. (4 marks)
(ii) Statement of profit or loss for the year ended 31 March 2024. (6 marks)
(b) On 30 June 2022, Fora Ltd. had a credit balance on its deferred tax account of Sh.1,340,600 all in respect of differences between depreciation and capital allowances.
During the year ended 30 June 2023, the following transactions took place:
- Sh.45 million was charged against profit in respect of depreciation. The tax computation showed capital allowances of Sh.50 million.
- Interest receivable of Sh.50,000 was reflected in profits for the period. However, only Sh.45,000 of interest was actually received during the year. Interest is not taxed until received.
- Interest payable of Sh.32,000 was treated as an expense for the period. However, only Sh.28,000 of interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is paid.
- During the year, Fora Ltd. incurred development costs of Sh.500,600 which it has capitalised. Development costs are an allowable expense for tax purposes in the period in which they are paid.
- Land and buildings with a net book value of Sh.4,900,500 were revalued to Sh.6 million.
- The tax rate is 30%.
- Fora Ltd. has a right to offset deferred tax asset and deferred tax liabilities.
Required:
Determine the deferred tax liability on 30 June 2023. (10 marks)
QUESTION 3
December 2023 Question One A
With reference to International Financial Reporting Standard (IFRS) 6 – Exploration for and Evaluation of Mineral Resources:
(i) State the underlying principle for measurement of exploration and evaluation assets. (2 marks)
(ii) Describe THREE circumstances that indicate that an entity should test exploration and evaluation assets for impairment. (3 marks)
QUESTION 4
August 2023 Question Two B and C
b) Roy Ltd. has provided the following information to be used in inventory valuation:
| Product | Cost Sh.“million” | Realisable value
Sh.“million” |
Selling expenses Sh.“million” |
| A | 100 | 120 | 25 |
| B | 50 | 60 | 5 |
| C | 75 | 85 | 15 |
Required:
Determine the value of closing inventory for Roy Ltd. in compliance with International Accounting Standard (IAS) 2 – Inventories. (3 marks)
(c) On 1 January 2022, a farmer had a herd of 100 cattle all of which were 2 years old. At this date, the fair value less point of sale costs of the herd was Sh.10,000,000.
On 1 July 2022, the farmer purchased 20 cattle (each two and a half years old) for Sh.60,000 each.
As at 31 December 2022, three-year-old cattle were selling at the market for Sh.90,000 each. Market auctioneers usually charge a sales levy of 2%.
Required:
(i) Valuation of cattle bought on 1 July 2022. (2 marks)
(ii) Valuation of cattle as at 31 December 2022. (1 mark)
(iii) Total charge to statement of profit and loss for the year ended 31 December 2022. (1 mark)
QUESTION 5
August 2023 Question Four B and C
(b) An item of plant and equipment in the books of Lima Ltd. had a carrying amount of Sh.6,000,000. It was classified as held for sale on 30 September 2022. At that date, its fair value less costs to sell was estimated at Sh.5,500,000. The asset was sold for Sh.5,550,000 on 30 November 2022. Lima Ltd.’s year end was 31 December 2022.
Required:
(i) Describe how the classification as held for sale and subsequent disposal should be treated in the financial statements of Lima Ltd. (2 marks)
(ii) State how your response in (b) (i) above would change if the carrying amount of the asset at 30 September 2022 was Sh.5,000,000 and the rest of the amounts remained unchanged. (1 mark)
(c) A company received legal advice that the most likely outcome of a court case brought by an employee is that it will lose the case and have to pay Sh.10 million. The legal team estimates that there is an 80% chance of this, but that there is also a 10% chance of having to pay Sh.12 million and a 10% chance of paying nothing.
Required:
Determine if a provision is necessary and the best estimate of provision, if any. (3 marks)
QUESTION 6
April 2023 Question One D
With reference to International Financial Reporting Standard (IFRS) – 5, Non-Current Assets Held for Sale and Discontinued Operations, describe the conditions that must be met for an asset to be classified as held for sale. (8 marks)
QUESTION 7
April 2023 Question Five
(a) In the context of International Accounting Standard (IAS) 12, Income Taxes:
(i) Explain the difference between “taxable temporary differences” and “deductible temporary differences”.
(2 marks)
(ii) Suggest how the tax base for “assets”, “revenue received in advance” and “other liabilities” can be determined. (6 marks)
(iii) A deferred tax liability is generally recognised for all taxable differences. There are however exceptions to this rule.
Summarise TWO exceptions to the above rule. (4 marks)
(b) BXL Manufacturers Ltd., a small firm engaged in the production of fertilizer, purchased an item of equipment for Sh.12 million on 1 July 2018. The company provides depreciation on equipment on a straight-line basis at the rate of 25% per annum. During the four years from 1 July 2018 to 30 June 2022, the profit after tax and allowed wear and tear charges for tax purposes were as follows:
| Period | Profit after tax | Allowable wear and tear charges |
| Sh.“000” | ||
| 1 July 2018 – 30 June 2019 | 2,400 | 40% on cost |
| 1 July 2019 – 30 June 2020 | 2,700 | 30% on cost |
| 1 July 2020 – 30 June 2021 | 2,850 | 20% on cost |
| 1 July 2021 – 30 June 2022 | 2,550 | 10% on cost |
Corporation tax for the period of four years remained at the rate of 30%.
Required:
Compute for each of the years ended 30 June 2019, 2020, 2021 and 2022:
(i) Taxable profit. (4 marks)
(ii) Deferred tax. (4 marks)
QUESTION 8
December 2022 Question One A
In the context of financial assets and financial liabilities:
(i) Provide an overview of what comprises a “financial asset” and a “financial liability”.
(2 marks)
(ii) With reference to the measurement and recognition of financial assets, recommend guidance to preparers of financial statements who reclassify financial assets under the following categories:
- Reclassification of a financial asset out of the amortised cost measurement category and into the face value through profit or loss measurement category. (2 marks)
- Reclassification of a financial asset out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category. (4 marks)
QUESTION 9
August 2022 Question One A
A number of developing countries are engaged in exploration of minerals to boost their economic empowerment.
Your company, an international mineral exploration firm has been contracted by one of the developing countries on a mineral exploration and evaluation engagement.
Required:
Advise the Board of Management of the company on the following:
(i) The relevant International Financial Reporting Standard (IFRS) for accounting for exploration of mineral resources and the scope of the standard. (4 marks)
(ii) The key provisions of the IFRS in (a) (i) above on impairments of assets used in exploration activities. (3 marks)
(iii) Disclosure requirements in the financial statements under the IFRS. (3 marks)
QUESTION 10
August 2022 Question Four A
On 1 January 2019, Brakewood Limited entered into a contract to lease an item of plant and equipment from a supplier for a three-year period. The terms of the lease were that Brakewood Limited was to pay Sh.500,000 each year with the payments commencing on 31 December 2019.
Initial direct costs incurred on the lease amounted to Sh.30,000 and were paid for by Brakewood Limited. The plant and equipment had a remaining economic useful life of five years at the inception of the lease. The lease contract did not contain any purchase option for the lessee.
Brakewood Limited can borrow at a rate of 10% a year.
Required:
Analyse the accounting treatment of the above lease transactions from the inception and for the three-year period of the lease contract. (10 marks)
QUESTION 11
August 2022 Question Five A
Discuss the business concept of “triple bottom line” as applied in financial reporting.(8 marks)
QUESTION 12
April 2022 Question Five A
With reference to International Accounting Standards (IAS) 41 – Agriculture:
(i) Describe the key provisions on measurement of agricultural produce. (5 marks)
(ii) Highlight six disclosure requirements where fair value of the farm produce cannot be measured reliably. (6 marks)
QUESTION 13
April 2022 Question Five B
Zeon Limited, a public limited entity is in the process of finalising its financial statements for the year ended 31 October 2021.
The following information has been extracted from its accounting records for the purpose of estimating the deferred tax balance:
- Inventory is stated in the financial statements at the lower of cost and net realisable value. The company wrote down its inventory by Sh.120 million to a net realisable value of Sh.1,130 million. The reduction in value is ignored for tax purposes until the inventory is sold.
- Trade receivables had a carrying amount of Sh.450 million after making a general provision for doubtful debts of Sh.30 million. The provision is not allowed for tax purposes.
- Property, plant and equipment has a carrying amount of Sh.3,050 million and a tax base of Sh.2,750 million. During the year ended 31 October 2021, property was revalued upwards by Sh.150 million.
- During the year to 31 October 2021, development expenditure amounting to Sh.480 million was capitalised. Amortisation of Sh.20 million was charged to profit or loss for the year. This development expenditure was allowed for tax purposes in full during the year.
- Trade and other payables are carried at Sh.600 million. Included in the other payables are accrued expenses of Sh.100 million whose related expenses are deductible for tax purposes on cash paid basis.
- Deferred tax liability as at 1 November 2020 amounted to Sh.272 million.
- The income tax rate of 30% is applicable.
Required:
(i) Compute the relevant temporary differences. (5 marks)
(ii) Deferred tax account as at 31 October 2021. (4 marks)
QUESTION 14
December 2021 Question One A
Accounting in general and financial reporting in particular are undergoing a dynamic transformation both in function and practice. Global forces are continuously reshaping accountancy as a profession.
Required:
In the context of the above statement, describe how the following forces are transforming the future of accounting:
(i) Cloud based accounting solutions. (2 marks)
(ii) Automation of the accounting function. (2 marks)
(iii) Outsourcing of accounting services. (2 marks)
(iv) Data analytics. (2 marks)
QUESTION 15
September 2021 Question Five A
The International Financial Reporting Standard (IFRS) 9 – Financial Instruments, specifies how an entity should classify and measure financial assets, financial liabilities and some contracts to buy or sell non-financial items.
Required:
Describe the requirements of IFRS – 9 as they relate to:
(i) Initial measurement of financial assets. (2 marks)
(ii) Subsequent measurement of financial assets. (4 marks)
(iii) Debt instruments. (4 marks)
(iv) Equity instruments. (2 marks)
QUESTION 16
May 2021 Question Two A
In the context of International Financial Reporting Standard (IFRS) 9 “Financial Instruments: Recognition and Measurement”, explain the accounting treatment of financial instruments that are equity instruments, both on initial recognition and subsequent measurement. (8 marks)
QUESTION 17
November 2020 Question one A
Citing two examples, explain the accounting treatment of contingent assets. (4 marks)
QUESTION 18
November 2020 Question one B
With reference to International Accounting Standard (IAS) — 16: Property, Plant and Equipment:
(i) Describe two conditions under which property, plant and equipment should be recognised. (4 marks)
(ii) Outline the provisions with regard to derecognition of property, plant and equipment. (4 marks)
QUESTION 19
November 2020 Question Three B
The following are the draft statements of financial position of Aby Limited and Benta Limited as at 30 April 2020:
| Aby Limited | Benta Limited | |
| Assets: | Sh.“million” | Sh.“million” |
| Non-current assets: | ||
| Property, plant and equipment | 25,290 | 5,420 |
| Investments | 8,120 | NIL |
| 33,410 | 5,420 | |
| Current assets: | ||
| Inventory | 2,750 | 1,295 |
| Trade receivables | 2,135 | 1,010 |
| Cash and bank balances | 1,220 | 575 |
| Total assets | 39,515 | 8,300 |
| Equity and liabilities: | ||
| Equity: | ||
| Ordinary shares of Sh.10 each | 12,500 | 3,800 |
| Revaluation surplus | 2,700 | 260 |
| Retained profit | 13,600 | 2,350 |
| 28,800 | 6,410 | |
| Non-current liabilities: | ||
| Deferred consideration | 1,800 | NIL |
| 10% debentures | 2,450 | 500 |
| Deferred tax | 1,920 | 375 |
| Current liabilities: | ||
| Trade payables | 3,200 | 655 |
| Current tax | 1,345 | 360 |
| Total equity and liabilities | 39,515 | 8,300 |
Additional information:
- On 10 May 2019, Aby Limited acquired 80% of the share capital of Benta Limited. At this date, the retained profit of Benta Limited amounted to Sh.2,200 million and the revaluation surplus stood at Sh.260 million.
Aby Limited paid an initial cash consideration of sh.5,940 million and agreed to pay the owners of Benta Limited a further Sh.1,800 million on 1 May 2021. The accountant of Aby Limited has recorded the full amounts of both elements of the consideration in investments. Aby Limited has a cost of capital of 8% and the appropriated discount factor is 0.857.
- On 1 May 2019, the fair values of Benta Limited’s net assets were equal to their carrying amounts with the exception of some inventory which had cost Sh.193 million but had a fair value of Sh.233 million. On 30 April 2020, 10% of these goods remained in the inventory of Benta Limited.
- During the year, Aby Limited sold goods worth $h.515 million to Benta Limited at a profit mark up of 25% above the cost. At 30 April 2020, Benta Limited still held Sh.75 million of these goods in its inventory.
- On 1 May 2019, Aby Limited also acquired an investment of 30% of the ordinary shares in Ceda Limited which cost Sh.380 million, Ceda Limited reported a profit of Sh.850 million during the year ended 30 April 2020.
- Aby Limited has a policy of valuing non-controlling interests at fair value. On 1 May 2019, the noncontrolling interest in Benta Limited had a fair value of Sh.1,317 million.
- Impairment tests carried out on 30 April 2020 concluded that the value of the investment in Ceda Limited was impaired by Sh.85 million while the consolidated goodwill was impaired by Sh.100 million.
Required:
i) Calculate the carrying amount of the investment in Ceda Limited to be included within the consolidated statement of financial position using the equity method. (2 marks)
(ii) The consolidated statement of financial position for the Aby Group as at 30 April 2020. (12 marks)
QUESTION 20
May 2019 Question five A
In the context of International Accounting Standard (IAS) 16 “Property, Plant and Equipment”, explain four disclosure requirements for items of property, plant and equipment which are stated at revalued amounts. (8 marks)
QUESTION 21
November 2018 Question One A
The objective of International Accounting Standard (IAS) 2 “Inventories” is to prescribe the accounting treatment for inventories. IAS 2 provides useful guidance particularly in economies which arc dependent on agriculture.
Required:
Summarise the key requirements of IAS 2 under the following headings:
(i) Scope of the term “inventories”. (2 marks)
(ii) Measurement of inventories. (3 marks)
(iii) Disclosure requirements. (4 marks)
QUESTION 22
November 2018 Question Three A
International Financial Reporting Standard (IFRS) 9 “Financial Instruments- establishes principles of derecognizing financial assets and financial liabilities. Derecognition is the removal of a previously recognised financial instrument from an entity’s statement of financial position.
Required:
With reference to the principles of I FRS 9, describe the criteria for derecognition of financial assets and financial liabilities of an entity. (6 Marks)
QUESTION 23
May 2018 Question one B
With reference to International Accounting Standard (IAS) 12-Income Taxes:
(i) Differentiate between a “deferred tax liability” and a “deferred tax asset”. (2 marks)
(ii) Explain the two types of temporary differences. (4 marks)
(iii) Describe the basis of measurement for current tax liabilities and deferred tax liabilities. (4 marks)
QUESTION 24
May 2018 Question four B
Royal Contractors Ltd. owns an item of plant used for construction with a carrying value of Sh.14 million as at 31 December 2015. The firm won a construction contract and decided to sell and lease back the machine on that date under the following conditions.
- Selling price Sh.40 million. This was also the fair value of the plant.
- Lease rentals payable annually in arrears amounted to Sh.15,521,200.
- Lease duration for the machine was to be 3 years. The economic life of the machine was also 3 years.
- The implicit interest rate was 8% per annum.
Required:
The journal entries to record the necessary transactions in the books of Roy al Contractors Ltd. for the three years, including the expected entries at the end of year 2018. (8 marks)
QUESTION 25
May 2018 Question five B
Discuss the impact of International Financial Reporting Standard (IFRS) 9 on the tax expenses of commercial banks. (6 marks)
QUESTION 26
November 2017 Question Two A
The new International Financial Reporting Standard (IFRS) 9 – Financial Instruments which was issued on 24 July 2014 and which will take effect from 1 January 2018, has generated significant discussions in your country, particularly within the banking sector.
Required:
Explain how IFRS 9 is likely to impact on the provisions for bad and doubtful debts by banks and by extension, the ease of accessing bank loans. (6 marks)
QUESTION 27
November 2017 Question Five A
Explain two key features of a sale and leaseback transaction, citing two advantages of such transactions. (6 marks)
QUESTION 28
November 2017 Question Five B
Rejareja Ltd. is a mid-size firm selling electronic keyboards both on cash and hire purchase terms. The following information has been extracted from the firm’s books of account as at 30 September 2017:
| Sh.”000″ | Sh.”000″ | |
| Share capital | 37,500 | |
| General operating expenses | 65,000 | |
| Cash balance | 3,104 | |
| Cash recovered from hire purchase customers | 157,734 | |
| Cash sales | 36,000 | |
| I-lire purchase trade receivables (1 October 2016) | 1,134 | |
| Property, plant and equipment | 50,000 | |
| Accumulated depreciation (1 October 2016) | 22,500 | |
| Retained earnings (1 October 2016) | 3,500 | |
| Provision for unrealised profit (1 October 2016) | 504 | |
| Purchases | 171 ,000 | |
| Trade payables | 40,000 | |
| Inventory (1 October 2016) | 7,500 | ______ |
| 297,738 | 297,738 |
Additional information:
- The company’s policy is to take credit for gross profit including interest for hire purchase sales in proportion to the cash collected. It does this by raising a provision against the profit included in the hire purchase trade receivables not yet due.
- The cash selling price is fixed at 50% and the hire purchase selling price at 80% respectively against the cost of goods purchased.
- The hire purchase contract requires an initial deposit of 20% of the hire purchase selling price, the balance to be paid in four installments at quarterly intervals. The first installment is due three months after the agreement is signed.
- Hire purchase sales for the year amounted to Sh.270,000,000 (including interest).
- Depreciation is charged on property, plant and equipment at the rate of 15% per annum on cost. One third of the depreciation relates to cash sales.
- Operating expenses are to be apportioned on the basis of cash and hire purchase sales.
Required:
Prepare for Rejareja Ltd.:
(i) Income statement for the year ended 30 September 2017 showing separate columns for cash, hire purchase and combined sales. (8 marks)
(ii) Statement of financial position as at 30 September 2017. (6 marks)
QUESTION 29
May 2017 Question One B
In the context of International Accounting Standard (IAS) 40 – Investment property:
- Define an “Investment property”, citing two examples (4 marks)
- Identify two types of property that are specifically not considered as investment property. (2 marks)
- Discuss the fair value model as applied in the valuation of investment property (6 marks)
QUESTION 30
November 2016 Question Three A
With reference to International Financial Standard (IFRS) 9 – Financial instruments:
- Describe the provisions governing the initial measurement and subsequent measurement of financial instruments. (4 marks)
- Explain the requirements for de-recognition of financial instruments: (4 marks)
QUESTION 31
May 2016 Question One B
Government grants are a common source of finance in developing economies.
Required:
(i) Explain the term “‘government grants” in the context of International Financial Reporting Standards(IFRSs). (3 marks)
(ii) Government grants may be accounted for using either the ”income” approach or the “capital” approach.
Discuss the arguments for each of the two approaches above. (6 marks)
QUESTION 32
May 2016 Question One C
Evaluate four criteria for consideration of a lease as a capital lease. (4 marks)
QUESTION 33
November 2015 Question Two A
With reference to international financial reporting standards (IFRSs), discuss the accounting treatment of government grants. Including the disclosure requirements (6 marks)
QUESTION 34
November 2015 Question Four C
Europa Ltd, a manufacturing company, leased a plant from smart equipment Ltd on a finance lease.
The details of the lease agreement are as follows:
| Date of commencement of lease | 1 January 2015 |
| Fair value of the plant on 1 January 2015 | Sh. 120 million |
| Expected useful life of plant | 3 years |
| Annual lease payment (paid in advance) | Sh. 50 million |
| Interest implicit in lease | 12% per annum |
| Lease period | 3 years |
| Residential value of plant | Sh. 6 million |
Required:
Show by way of extracts, how the above transaction would be reflected by Europa Ltd in the following:
- Income statements for the years ending 31 December 2015 and 31 December 2016. ( 3 marks)
- Statements of financial position as at 31 December 2015 and 31 December 2016. (3 marks)
QUESTION 35
November 2015 Question Four D
Outline the main benefit of a sale and leaseback transaction to the vendor. (2 marks)
QUESTION 36
Pilot Paper September 2015 Question Three A
Enumerate four enhancing qualitative characteristics of good financial information (4 marks)
QUESTION 37
Pilot Paper September 2015 Question Four B
Madwang Ltd leased out its plant to Kasheshe Hauliers Ltd, under a finance lease on 1 January 2010. The fair value of the plant on 1 January 2010 was sh. 870,000. The lease provided for 6 annual rentals sh. 200,000 each receivable at the end of each year.
The interest implicit in the lease is 10%.
Required:
Using actuarial method, show in the books of Madwang Ltd.
- Income statement extracts over the lease term. (6 marks)
- Statement of financial position extracts suitably classified. (6 marks)
QUESTION 38
Pilot Paper September 2015 Question Five A
Explain the fair value model of accounting for investment property as per IAS 40 (investment property). (4 marks)
QUESTION 39
May 2015 Question Two A
With respect to international accounting standard (IAS) “Accounting for Government grants and disclosure of government assistance ”, explain the following terms:
- Government assistance (2 marks)
- Government grant (2 marks)
- Forgivable loan (2 marks)
