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This revision kit consists of kasneb past paper questions and their suggested answers to act as a revision guide for those students taking kasneb courses.
CONTENT
Topic 1: Accounting for Assets and Liabilities – View Questions
Topic 2: Preparation of Financial Statements for Interests in Other entities – View Questions
Topic 3: Preparation of Financial Statements for other entities – View Questions
Topic 4: Analysing Financial Statements – View Questions
Topic 5: Public Sector Accounting Standards – View Questions
Topic 6: Other Reports and Emerging Issues in Financial Reporting – View Questions
TOPIC 1
ACCOUNTING FOR ASSETS AND LIABILITIES
TOPIC 1
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:
(i) Scope of the term “inventories”. (2 marks)
(ii) Measurement of inventories. (3 marks)
(iii) Disclosure requirements. (3 marks)
ANSWER
(i) Scope of the term inventories
Inventory is an asset heed for sale in the normal course of the business. This includes raw materials, work in progress or finished goods. Inventory also includes material and supplies that are consumed in production.
(ii) Measurement of inventories
Inventory should be stated based on the lower of cost and the net realized value (NRV). The cost shall comprise
- Cost of purchase – This comprise purchase price, import duties and other non refundable taxes, transport cost handling and other direct costs.
- Cost of conversion – This comprise the direct labour cost, variable production overheads and fixed production overhead.
- Administrative cost, selling cost, abnormal losses shortage cost etc.
(ii) Disclosure requirements
- Method adopted in determining the cost
- The carrying amount of inventories suitably classified into raw materials WIP and finished goods
- Inventory that was valued at net realizable value
- Circumstances leading to written down inventories to net realizable value
- Inventories pledged as securities
- Accounting policy of the inventory
(d) With reference to International Financial Reporting Standard (IFRS) 9 – Financial instruments, explain the requirement for derecognition of financial instruments.
(3 marks)
ANSWER
Requirement for derecognition of financial instruments as per IFRS 9
De-recognition is the removal of a previously recognized financial instrument from entity’s financial statement de-recognition shall happen when:
- When the entity contractual rights or the assets cash flows have expired or
- The asset have been transferred to a third party along with the risks of ownership (when sold)
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)
ANSWER
(i) Property, plant and equipment movement schedule for the year ended 31 March 2024
PPE movement schedule For the year ended 31 March 2024 | ||||
Property Sh 000 | Plant Machinery | Motor vehicle | Furniture fittings | |
Cost as per 1 April 2023 | 457,000 | 360,000 | 82,000 | 64,000 |
Less: Accumulated depreciation brought forward |
(162,800) |
(119,400) |
(41,000) |
(25,600) |
Carrying amount at 1 April 2023
Less: disposal carrying amount |
294,200
– |
240,600
(46,200) |
41,000
– |
38,400
– |
Less: Depreciation for the year |
294,200
(7,400) |
194,400
(24,300) |
41,000
(21,000) |
38,400
(6,400) |
Carrying amount at 31 March 2024 | 286,800 | 170,100 | 20,000 | 32,000 |
(ii) Statement of profit or loss for the year ended 31 March 2024
Kalen Ltd
Statement Of Profit Or Loss For The Year Ended 31 March 2024 |
|
Sh 000 | |
Revenue | 1,783,800 |
Cost of sales | (1,329,000) |
Gross profit | 454,800 |
Expenses | |
Administrative expenses (258,600 + 7,400 + 6,400) | (272,400) |
Distribution expenses (209,900 + 21,000) | (230,900) |
Finance cost (W3) | (120,000) |
Profit before tax | (60,500) |
Tax (W4) | 1,900 |
Profit after tax | (41,500) |
Workings
W1
Disposal loss of plant item | Sh 000 |
Disposal proceed | 42,000 |
Carrying amount | (46,200) |
Disposal loss —[to cost of sale] | 4,200 |
W2
Depreciation of assets
Plant & equipment = 12.5% [360,000 – 119,400 – 462,000] = 24,300
Building = 2% × 370,000 = 7,400 Admin expenses
Motor vehicles = 25% × 82,000 = 21,000 Distribution expenses
Furnitures & fittings = 10% × 64,000 = 6,400 Admin expenses
W3
8% of loan note
Balance as at 1 April 2023 | 120,000 |
Interest expense 10% × 120,000 (to P&L) | 12,000 |
Less: Coupon interest paid 8% × 120,000 | (9,600) |
Balance as at 31 March 2024 | 122,400 |
W4
Deffered tax asset
Increase in deferred tax asset
Balance as at 1 April 2023 | 33,000 |
Balance as at 31 March 2024 | 36,300 |
Increased amount ( Tax income) | 3,300 |
Tax expense
For the year [tax credit] | 15,700 |
Deffered tax changes | 3,300 |
19,000 |
(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)
(Total: 20 marks)
ANSWER
(Income Tax IAS 12
Income statement items
Taxable items | Accounting per item | Temporary differences | |
Depreciation & capital allowance | 50,000,000 | 45,000,000 | 5,000,000 |
Interest income | (45,000) | (50,000) | 5,000 |
Interest expenses | 28,000 | 32,000 | (4,000) |
5,001,000 |
NB: Expenses are recognized as positive and income as negative
Statement of financial positions items
Carrying amount | Tax base | Temporary differences | |
Development cost | 500,600 | 0 | 500,600 |
Interest income | 6,000,000 | 4,900,500 | 1,099,500 |
1,600,100 |
Deffered tax liability as 30 June 2023
Deffered tax account
Balance b/d | 1,340,600 | ||
Revaluation of land | |||
Balance c/d | 1,980,330 | 30% × 1,099,500 | 329,850 |
________ | To profit or loss a/c | 309,880 | |
1,980,330 | 1,980,330 |
QUESTION 1
December 2023 Question One B and C
- b) Titans Ltd. which is a wholly owned subsidiary of Venus Ltd. is a cash generating unit in its own right. The value of property, plant and equipment of Titans Ltd. as at 31 October 2023 was Sh.6 million and purchased goodwill was Sh.1 million before impairment loss. The company had no other assets or liabilities. An impairment loss of Sh.1.8 million had occurred as at 31 October 2023. The directors wish to know how the impairment loss will affect the deferred tax liability for the year. Impairment losses are not an allowable expense for taxation purposes. The tax base of the property, plant and equipment as at 31 October 2023 was Sh.4 million.
Required:
Assuming a corporate tax rate of 30%, discuss with suitable computations how the above situation will impact on accounting for deferred tax under IAS 12 (Income Taxes) in the group financial statements of Venus Group. (8 marks)
(c) Saruji Ltd. operates a defined benefit scheme which had a net obligation of Sh.120 million as at 31 December 2021. The following details relate to the scheme for the financial year ended 31 December 2022:
Sh.“million” | |
Current service cost | 55 |
Cash contribution to the scheme | 100 |
Benefits paid during the year | 80 |
Net loss on curtailment | 11 |
Gain on remeasurement of liability as at 31 December 2022 | 9 |
The rate of interest applicable to corporate bonds was 5% as at 31 December 2021. The cash contributions to the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2022. This is the only adjustment that has been made in respect of the scheme.
Required:
Recommend to the directors of Saruji Ltd. the correct accounting treatment of the above transactions in the financial statements for the year ended 31 December 2022, including financial statements extracts in accordance with IAS 19 (Employee Benefits). (6 marks)
ANSWER
- b) The imparement loss in the financial statement of Titans ltd reduces the carrying value PPE but is not tax allowable.
This is the tax base of PPE is different from its carrying value and there is a temparary difference
Under IAS 36, impairement of assets is first allocated to goodwill and then other asset.
Asset | Cost | Impairment | Carrying value |
Identifiable | 6,000 | (800) | 5,200 |
Goodwill | 1,000 | 1,000 | 0 |
7,000 | 1,800 | 5,200 |
IAS 12 provides that no deffered tax should be recognized on goodwill and therefore, only the impairment loss relating to PPE affects tax as follows:
Before impairment | After | Difference | |
Carrying amount | 6,000 | 5,200 | |
Tax base | (4,000) | (4,000) | |
Temporary difference | 2,000 | 1,200 | |
Tax liability 30% | 600 | 360 | 240 |
Impairment loss thus reduces deffered tax liability by Sh 240,000
- c) Defined plan liability
The defined benefit scheme for the year should have been recorded as follows
Sh million | |
Net obligation b/d (31 Dec 2021) | 120 |
Add: Current service cost | 55 |
Loss on curtailment | 11 |
Interest cost 5%x120 | 6 |
Less: Benefit paid | (80) |
112 | |
Measurement gain/Acturial gain | (9) |
Net person liability as at 31 Dec 2022 | 103 |
The cash contribution to the scheme do not affect the net liability for the year. The cost incurred i.e. service cost, interest cost and loss on curtailment should be expressed to profit and loss then measurement gain to other comprehensive income.
Income statement extract for the year ended 31 December 2022 | ||
Expenses | Sh Million | Sh Million |
Current service cost | 55 | |
Less on curtailment | 11 | |
Finance cost | 6 | (72) |
Other Comprehensive income | ||
Measurement gain | 9 | |
63 |
Statement of financial position extract
as at 31 December 2022 |
|
Equity and liabilities | Sh Million |
Reameasurement component | 9 |
Non current liabilities | |
Net defined obligation | 103 |
QUESTION 2
December 2023 Question Three B and C
(b) The purpose of the statement of profit or loss and other comprehensive incomes is to show an entity’s financial performance in a way that is useful to a wide range of users. However, the accounting treatment and guidance with respect to other comprehensive incomes has been criticised recently.
Required:
Discuss FOUR criticisms that have been raised in respect to the accounting treatment of other comprehensive incomes. (4 marks)
(c) A division of Ziwa Ltd. has the following non-current assets which are stated at their carrying values as at 31 December 2022:
Sh.“million” | Sh.“million” | |
Goodwill | 70 | |
Property, plant and equipment: | ||
Land and buildings | 320 | |
Plant and machinery | 110 | 430 |
500 |
Since the assets are used to produce a specific product, it is possible to identify the cash flows arising from their use. The management of Ziwa Ltd. believes that the value of these assets may have become impaired, because a major competitor has developed a superior version of the same products.
Forecast cash inflows arising from the use of the assets are as follows:
Year ended | Sh.“million” |
31 December 2023 | 185 |
31 December 2024 | 160 |
31 December 2025 | 130 |
The following additional information is useful:
- The directors are of the opinion that the market would expect a pre-tax return of 12% on an investment in an entity that manufactures a product of this type.
- The land and buildings are carried at revaluation. The surplus relating to the revaluation of the land and buildings that remain in the revaluation surplus reserve as at 31 December 2022 is Sh.65 million. All other non-current assets are carried at historical cost.
- The goodwill does not have a market value. It is estimated that the land and buildings could be sold at Sh.270 million and the plant and machinery could be sold for Sh.50 million net of direct selling costs.
Required:
(i) Calculate impairment loss to be recognised in the accounts of Ziwa Ltd. (6 marks)
(ii) Explain how the loss will be treated in the financial statements for the year ended 31 December 2022. (6 marks)
(Total: 20 marks)
ANSWER
- b) Some of the criticism of other comprehensive income (OCI) are:
- There is no consistent basis across IFRS for determining when a gain or loss and when it is recognized in OCI. This often means that the OCI is not fully understood by the users of the financial statement
- Many users ignores OCI since the gains and losses reported there are not related to operating flows of an entity. As a result, material losses presented in OCI may not be given the attention that they require. Material losses presented in OCI may not be given the attention that they require
- There are differences between IFRS and USGMP in respect of OCI. This reduces the comparability of profit based performance measures.
- The notion of a recycling gains and losses from OCI is unclear.
c)
Impairment loss | Sh Million |
Carrying amount | 500 |
Recoverable amount | (385) |
Impairment loss | 115 |
Working
W1
Value in use
Year | Cash flows | PVIF12% | PV |
2023 | 185 | 0.829 | 165.19 |
2024 | 160 | 0.7972 | 127.55 |
2025 | 130 | 0.7118 | 92.53 |
385.00 |
W2
Fair value less cost to sell
Goodwill | 0 |
Freehold | 270 |
Land & building | 50 |
320 |
- ii) Allocation of impairment loss
IAS 36 requires impairment loss to be allocated to various non current in the following order
- First write of any goodwill
- Then allocate The balance to other non current asset in their proportion to their carrying amount
Assets | Carrying amount | Impairment loss | |
Good will | 70 | (70) | 0 |
Land and building | 320 | (33) | 287 |
Plant and machinery | 110 | (12) | 98 |
500 | 115 | 385 |
Allocation 115 – 70 = 45
Land and building | 320 | 0.74 | 0.74 × 45 = 33 |
Plant | 110 | 0.26 | 0.26 × 45 = 12 |
430 |
QUESTION 3
December 2023 Question Four B
On 1 April 2019, M Ltd. granted 500 share appreciation rights (SARs) to each of its 300 employees. All of the rights vested on 31 March 2021 and could be exercised from 1 April 2021 up to 31 March 2023. At the grant date, the value of each SAR was Sh.10 and it was estimated that 5% of the employees would leave during the vesting period. The fair values of the SARs at various dates were as follows:
Date | Fair value of SAR (Sh.) |
31 March 2020 | 9 |
31 March 2021 | 11 |
31 March 2022 | 12 |
All the employees who were expected to leave employment, did leave the company as expected before 31 March 2021. On 31 March 2022, 60 employees exercised their options when the intrinsic value of the right was Sh.10.50 and were paid in cash.
The Chief Accountant of M Ltd. is, however, confused as to whether to account for the SARs under IFRS 2 (Share-based Payment) or IFRS 13 (Fair Value Measurement) and would like to be advised as to how the SARs should have been accounted for from the grant date up to 31 March 2022.
Required:
Advise the Chief Accountant of M. Ltd. on how the above transactions should be accounted for in its financial statements with reference to the relevant International Financial Reporting Standards (IFRSs). (12 marks)
ANSWER
M Ltd will account for this transaction under the provisions of IFRS 2 share based payment). IFRS 13 (fair value measurement) applies when another IFRS require or permits fair value measurements. IFRS 13 excludes transactions covered by certain other standards including share based payment transactions with the scope of IFRS and leasing transaction with scope IFRS 16 (leases)
Therefore share based payment transaction are outside the scope of IFRS 13. Far cash settle share – based payment transactions, the fair value of the liability is measured in accordance with FRS 2 initially, at each reporting date and at the date of settlement using an option pricing model. Unlike equity settled transactions, the measurement reflects all conditions and outcome on weighted average basis.
Period | Liability | Expenses |
2020 | 300 × 95 × 500 × 9 × ½ = 641,250 | 641,250 |
2021 | 300 × 95% × 500 × 11 × 2/2 = 1,567,500 | 926,250 |
2022 | (285-60) × 500 × 12 = 135,000 = 97,500.00 | 97,500 (W1) |
Working 1
- Cash paid is 60 × 500 × 10.5 = 315,000
- The liability has reduced by 217,500 (1567500 – 1350,000)
- Expenses difference therefore sold be 315,000 – 217500 = 97,500
QUESTION 4
August 2023 Question Three A
B Limited purchased a loan note for Sh.2,000,000 on 1 April 2021 and intends to hold it until maturity. The effective interest rate is 10% per annum which was the same as the nominal rate.
The loan note will mature on 31 March 2024 and annual payments are in arrears. On 31 March 2022, B Limited received interest of Sh.200,000. B Limited estimated that no further interest would be received and only half of the initial capital would be repaid on 31 March 2024. The probability of default on the loan note within the next 12 months was 0.5% and the credit risk as at 31 March 2022 was low.
The 10% present value factors are as follows:
Year | 1 | 2 | 3 |
Present value factor | 0.91 | 0.83 | 0.75 |
Required:
Illustrate the accounting treatment of the investment in the loan note as at 31 March 2022 in accordance with International Financial Reporting Standard (IFRS) 9: “Financial Instruments”.
(8 marks)
ANSWER
- The credit risk on the loan has not significantly increased. A loss allowance should be made equal to 12 months expected credit loss. The loss allowance should factor in a range of possible outcomes as well as the time value of money.
- Annual interest 10% × 2,000,000. Half of this would not be received on maturity i.e. sh 1,000,000 which would be also a shortfall
Year to | Short (sh) | PV(Factor) | PV(sh) |
31/3/2023 | 200,000 | 0.91 | 182,000 |
31/3/2024 | 200,000 | 0.83 | 166,000 |
31/3/2024 | 1,000,000 | 0.83 | 830,000 |
1,178,000 |
Expected credit loss (12 months)0.5%x1178,000=5890
- A loss allowance of sh 5890 and a similar amount charged as a loss in the P&L for the year ended 31 March 2022.
Net carrying amount
Sh | |
Gross amount | 2,000,000 |
Loss allowance | (5,890) |
Net carrying amount | 1,994,110 |
QUESTION 5
August 2023 Question Four
(a) (i) With reference to International Financial Reporting Standard (IFRS) 2 “Share based Payments” and citing examples, explain the impact of a non-market based performance condition on accounting for an equity-settled share based payment transaction. (4 marks)
(ii) On 1 January 2020, Tabora Limited granted each of its 180 employees 1,000 share options. These options would vest if the employees remained in the employment of the company until 31 December 2022.
On the grant date, the fair value of the share options was Sh.15 each.
Twenty five (25) employees left the company during the year ended 31 December 2020 and a further thirty (30) employees were expected to leave in each of the two years ended 31 December 2021 and 31 December 2022.
During the years ended 31 December 2021 and 31 December 2022, twenty (20) employees and eighteen (18) employees terminated their employment contracts respectively.
Required:
Show the extracts of financial statements for Tabora Limited for each of the three years ended 31 December 2020, 31 December 2021 and 31 December 2022 to record the above transactions.
(6 marks)
ANSWER
- i) A non market performance condition is not related to market price of the entity’s equity instruments
- Examples of non- market performance conditions include EPS and profit targets
- Non market based performance conditions must be taken into account in determining whether an expense should be recognized in a reporting period
ii
Period | Equity | Expenses |
2020 | (180-25-60)×1,000×15 × 1/3 = 475,000 | 475,000 |
2021 | (180-25-20-30)×1,000×15 × 2/3 = 1,050,000 | 575,000 |
2022 | (180-25-20-18)×1,000×15 × 3/3 = 1,755,000 | 705,000 |
Income statement extract | |||
Expenses : | 2020 | 2021 | 2022 |
Employee Remuneration Expenses | 475,000 | 575,000 | 705,000 |
Statement OF Financial Position Extract | |||
Equity: | 2020 | 2021 | 2022 |
Share based payment reserve | 475,000 | 1,050,000 | 1,755,000 |
(b) Waigwa Limited is a public limited company quoted on the securities exchange. The company’s capital structure comprises both equity and debt financing. On 1 August 2019, the company raised additional finance by issuing Sh.24,000,000 four-year deep discount bonds.
kindly help me with cpa level 2 notes
boaz kipkoech
I NEED REVISION KITS AND PAST PAPERS
i am burundian following CPA training at summit international Institute of Bujumbura
i realized that it is not easy to access to CPA notes and revision kits.
please kindly help with that
Evrard NZEYIMANA