MUNHUMUTAPA SCHOOL OF COMMERCE
DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS
BACHELOR OF COMMERCE DEGREE
LEVEL 4 SEMESTER 2
EXAMINATION QUESTION PAPER
MODULE CODE AC413
MODULE NARRATION SPECIFIC FINANCIAL REPORTING
DATE
DURATION 3 HOURS
INSTRUCTIONS TO CANDIDATES:
1. Answer all Questions
2. Start a new answer on a fresh page
3. Silent non-programmable calculators may be used in the examination room
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QUESTION 1
(a)
You have recently been appointed as the accountant of XYZ Ltd. The company is in the
process of constructing a new plant for the production of a product known as Jos. The board
of directors became aware of IAS 23 and approached you for advice.
You obtained the following information:
1. The board of directors appointed a committee to research the project. The
committee estimated that it would take 20 months to complete the plant.
2. Construction on the plant commenced on 12 June 20.1
3. Expenditure associated with the project has already been capitalized to the cost of
the plant.
4. No borrowing costs have been capitalized to date.
5. The project has been, or will be financed as follows:
Use of a general overdraft facility at an interest cost of 24% per annum until 31
October 20.1
The issue of debentures on 1 November 20.1 at an interest cost of 12% per
annum, redeemable at a premium of 5%. These debentures will be issued
specifically to finance the project.
6. The company’s year-end is 31 October 20.1
Required
Advice the board of directors of XYZ Ltd on the following:
a. On how borrowing costs should be handled by reference to IAS 23. (10 marks)
b. Whether the company will be able to capitalize the interest paid on debentures,
as well as the premium on future redemption, to the plant. (4 marks)
(b)
On 1 January 20.14,an entity enters into a cancellable contract to transfer a product
to a customer on 31 March 20.14.The contract requires the customer to pay
consideration of $1000 in advance on 31 January 20.14.The customer pays the
consideration on 1 March 20.14. The entity transfers the product on 31 March 20.14.
Required:
The journal entries to illustrate how the entity accounts for the contract under :
i. Cancellable contract (5 marks)
ii. None cancellable contract (6 marks)
[Total 25 marks]
QUESTION 2
(a)
B Limited has 5 supervisors who receive a salary of $75 000 each per annum. It is generally
accepted that salaries will increase by 6% per annum. B Limited received a government
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grant of $100 000 on 1 January 2017 in total for the supervisors on condition they are
employed for a minimum of 3years.
Required
Prepare financial statements extracts for the years ended 31 December 2017, December
2018 and December 2019 (9 marks)
(b)
Aguma Ltd provides medical services in remote areas in Uzumba-Maramba Pfungwe.
They receive government grant every year in respect of these medical services provided in
that specific year, since the government wishes to provide medical services to all residents
of Zimbabwe.
During the year ended 31 December 2018 Aguma Ltd collected $10 000 from the
inhabitants of the remote area for the services rendered and received a $400 000 grant on 1
January 2018 from the government. Aguma Ltd spent $500 000 in respect of the provision
of medical services in remote areas in Uzumba-Maramba Pfungwe.
Assume a tax rate of 28%. Aguma Ltd has no other income or expenses. Assume also that
there will be sufficient other taxable income in future periods and that deferred tax assets
can be recognised. The grants received from the government are taxable when received.
Required:
a) Prepare the journal entries (cash transactions included) for the year ended
31December 2018 in respect of the above transactions if it is assumed that the
government grant is presented as other income in the statement of profit or loss and
Other comprehensive income. (8 marks)
b) Prepare the journal entries (cash transactions included) for the year ended
31December 2018 in respect of the above transactions if it is assumed that the
Government grant is deducted from the related expense, in the statement of profit
or loss and other comprehensive income. (8 marks)
Your solution must comply with the requirements of International Financial Reporting
standards.
[Total 25 marks]
QUESTION 3
(a) Tagz limited is involved in the importation and sale of agriculture equipment. The
following information relate to two combine harvesters imported in the year 2017.
-FOB cost for both harvesters $200000
-Import duties $10000
-Clearing agent costs $5000
-Wages for staff $4500
-Sales: -Harvester 1 (1.6.17) $150000
-Harvester 2 (1.7.17) pre-invoicing $150000
Additional information:
1. Wages for staff include an amount of $2000 which was specifically for bringing the
harvesters into use.
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2. The price for each combine harvester includes amounts for Value added Tax, of which no
remittance has been made to the tax authorities.
3. Due to economic changes, the market prices at year end have been reduced to $120000
excluding VAT with selling expenses estimated at $30000.
Required:
Determine the following:
1. Revenue to be recognised
2. Expenses to be recognised
3. The cost for the combine harvesters
4. Liabilities
5. Classification and measurement of the combine harvesters at year end.
(15 marks)
(b)
On 30 September 2018 C Ltd started with the construction of a plant which will take a long
time to complete. The expenses on the project were paid as follows;
Period $
30/09/18 50 000
31/10/18 20 000
30/11/18 60 000
31/12/18 80 000
A loan of $300 000 was acquired on 30 September 2018 specifically for purposes of erection
of the plant. The loan carries interest at 16 % per annum, payable annually in arrears.
Surplus funds from the loan are invested temporarily and these produced interest incomes
of $ 10 000.
Required
i. Calculate the borrowing costs that can be capitalized to 31/12/18 (4 marks)
ii. Calculate the borrowing costs that can be capitalized to 31/12/18 if the $300 000
was an overdraft facility (6 marks)
[Total 25 marks]
QUESTION 4
On 1 January 20X1 an entity entered, as lessee, into a five-year non-cancellable lease of a
machine that has an economic life of five years and nil residual value.
On 1 January 20X1 (the inception of the lease) the fair value (cash cost) of the machine is
RTGS$100,000.
On 31 December for each of the first four years of the lease term the lessee is required to
pay the lessor RTGS$23,000. At the end of the lease term, ownership of the machine passes
to the lessee upon payment of the final lease payment of RTGS$23,539.
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The interest rate implicit in the lease is 5 per cent per year. This rate approximates the
lessee’s incremental borrowing rate.
Required:
The financial statement extracts of the entity for 5 years the lease was in operation.
[Total: 25 Marks]
End of examination
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