SECTION II (60 MARKS)

Answer ALL questions in this section.

QUESTION 21:
Wakwi Limited is a public entity which has grown in recent years by acquiring established business entities. The directors of Wakwi Limited
have identified two potential entities targeted for a takeover. The directors believe that the shareholders of the two target companies would
be receptive to a takeover. As a pre-requisite to the takeover decision, the directors have tasked a firm of consultants to carry out a cross-sectional
analysis of the financial statements of the two potential target companies which operate in the same industry sector.

The financial statements of the two entities as at 30 September 2024 are shown below:

Statement of profit or loss for the year ended 30 Septemebr 2024:

Remi Ltd. Popino Ltd.

Sh.''000'' Sh.''000''
Revenue 87,500 140,000
Cost of sales 66,500 114,800
Gross profit 21,000 25,200
Distribution costs 1,495 2,710
Administrative expenses 2,880 5,340
Operating profit 16,625 17,150
Finance costs 875 3,150
Profit before tax 15,750 14,000
Income tax expense 3,150 3,500
Profit for the year 12,600 10,500

Statement of financial position as at 30 September 2024:

Remi Ltd. Popino Ltd.

Assets: Sh.''000'' Sh.''000''
Non-current assets:
Property 9,800 10,500
Owned plant 7,000 8,050
Right of use of asset - 17,500
16,800 36,050
Current assets:
Inventory 5,600 11,900
Trade receivables 7,350 17,850
Bank 3,850 700
Total assets 33,600 66,500
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value) 3,500 7,000
Revaluation surplus 1,750 3,150
Retained earnings 5,600 9,450
Total equity 10,850 19,600
Non-current liabilities:
Lease liability - 14,700
10% loans 15,750 17,500
Current liabilities:
Trade payables 4,375 7,350
Lease liability - 2,450
Current tax 2,625 4,900
Total equity and liabilities 33,600 66,500

Required:
(a) Common size statements of profit or loss for the two entities for the year ended 30 September 2024. (8 marks)
(b) Common size statements of financial position as at 30 September 2024. (10 marks)
(c) Advise the directors of Wakwi Limited on the best company for take over. (2 marks)
(Total: 20 marks)

CA35P page 5
Out of 9
QUESTION 22:
Mustard Limited is planning to launch a new product branded "Malinex" beginning January 2025.

The following data relates to the launch of the product:

Year
End 2024 2025 2026 2027 2028 2029
Initial investment (Sh.''000") 500,000
Resale value (Sh."000") 70,000
Production and sale quantities (units) 60,000 60,000 60,000 50,000 40,000
Selling price per unit (Sh.) 5,000 5,500 6,000 6,500 7,000
Variable cost per unit (Sh.) 3,000 3,200 3,400 3,600 3,800
Total fixed costs (Sh."000") 15,000 18,000 19,000 20,000 22,000
Depreciation (Sh."000") 150,000 105,000 75,000 50,000 35,000

Additional information:
1. Corporation tax will be charged at the rate of 30% and is paid annualy at the end of the same year when earned. Tax will also
apply on the disposal of the machine at the end of the project's life.
2. Depreciation is the same as capital allowances.
3. Working capital of Sh.20 million will be required at the beginning of the project. This will increase at Sh.5 million for each of the 4 years, and then
released at the end of the project life in 2029.

Required:
(a) Compute the Return on Investment (ROI) of the project.
(b) Compute the projects after tax cash flows over the five years.
(c) Plot a graph of the project's Net Present Value (NPV) profile given the weighted average cost of capital (WACC) ranging from 1% to 15%.
(d) Determine the project's Internal Rate of Return (IRR).
(e) Compute the project's profitability Index (PI) at 10% weighted average cost of capital (WACC).

5000000 1000
(b) Compute the projects after tax cash flows over the five years.

End 2024 2025 2026 2027 2028 2029

Sales 300,000,000.00 330,000,000.00 360,000,000.00 325,000,000.00 280,000,000.00
VC 180,000,000.00 192,000,000.00 204,000,000.00 180,000,000.00 152,000,000.00
FC 15,000,000 18,000,000 19,000,000 20,000,000 22,000,000
depreciation 150,000,000 105,000,000 75,000,000 50,000,000 35,000,000
EBT (45,000,000) 15,000,000 62,000,000 75,000,000 71,000,000
TAX (13,500,000) 4500000 18600000 22500000 21300000
EAT (31,500,000) 10,500,000 43,400,000 52,500,000 49,700,000
depreciation 150,000,000 105,000,000 75,000,000 50,000,000 35,000,000
CASH FLOW 118,500,000 115,500,000 118,400,000 102,500,000 84,700,000
RESALE VALUE 70,000,000

Initial cost (500,000,000)

W/C (20,000,000) (25,000,000) (30,000,000) (35,000,000) (40,000,000) (40,000,000)
CHANGE IN WC (5,000,000) (5,000,000) (5,000,000) (5,000,000) 0
Savings on Tax on loss on disposal 4,500,000
wc revoverd 40,000,000.00

net cash flow (520,000,000) 113,500,000 110,500,000 113,400,000 97,500,000 199,200,000.00

(a) Compute the Return on Investment (ROI) of the project.

ROI NET AFTER TAX CASH FLOW-INITIAL COST*100

INITIAL COST

After tax cash flow(net cash flow 634,100,000

years, and then

(5 marks)
(5 marks)
(5 marks)
(3 marks)
(2 marks)
(Total: 20 marks)

Cost
Accd dep
NBV
Disposal
Loss

415,000,000

(5 marks)

CA35P Page 6
Out of 9
QUESTION 23:
Elimu Busara Foundation runs a group of secondary schools in the country. Among their schools is Masomo Bora High School. The schools are
funded by school fees and partially sponsored by capitation from the government and donations from alumni and well-wishers.
Masomo Bora High School is preparing the budget for the year 2025, with the three terms commencing January, May and September.

The following details relate to the budget preparation:

1. The school estimates it will have 120 students in form one, 110 students in form two, and 100 students in form three and 100 students in form four.
The form ones will report in February 2025.

The following is the fee structure that is payable by the parents per term:

Form 1 - Sh.33,500
Form 2 - Sh.36,500
Form 3 - Sh.43,500
Form 4 - Sh.45,000

2. Parents are usually required to pay 60% of the fee when the school opens, and the balance at the beginning of the next month (Form ones pay 60%
when they report in February and 40% in March).

3. The school receives a capitation of Sh.16,000 per student per term, which is received at the beginning of the term.

4. On average, the school receives donations of Sh.2.5 million per month but this reduces to 60% when the school is closed.

5. The school has a small farm from which it generates harvested produce. It is estimated that the produce generates Sh.200,000 per month.

6. In addition, the school hires out the bus every weekend for events earning Sh.60,000 per month except in December when the bus driver is on leave.

7. The school pays on average salaries and wages of Sh.6.2 million per month, even when students have closed.

8. The school spends on average Sh.550,000 on general consumables, which reduce to 60% when the school is closed.

9. The school buys new text books and also replaces old ones at the beginning of every term for Sh.650,000.

10. The school provides meals to staff and students at an average cost of Sh.1.5 million per month. This is catered for in the school fees and capitation.
The amount reduces to 40% when the school is closed.

11. Electricity and water bills average Sh.150,000 per month (and Sh.50,000 when the school is closed). Repairs and maintenance also amount to
Sh.250,000 per month and reduces to 40% when the school is closed.

12. The school plans to buy additional learning and staff equipment worth Sh. 1.5 million in January and replace old furniture at a cost of Sh.2 million
in May. The old furniture will be scrapped at Sh.200,000.

13. The school has a loan, for which it will pay the annual installment of Sh.2 million and interest of Sh.200,000 in December.

14. The School estimates that it will have cash balance of Sh.5.5 million on 1st January 2025.

Required:
Prepare a cash budget for the year ended 31 December 2025, on a month-by-month basis and also for the whole year. (Total: 20 marks)

CA35P Page 7
Out of 9
 SECTION III (20 MARKS)

Answer only ONE (1) question in this section.

QUESTION 24:
You are a tax consultant for Wasafi Solutions Ltd., a Kenyan company that specialises in renewable energy technologies.
The financial year ended 31 December 2024 and the company is preparing its financial statements for tax compliance and planning purposes.

Below is the financial data provided by the company:

Description Amount (Sh."000")

Revenue 80,000
Cost of Goods Sold (COGS) 40,000
Operating expenses 15,000
Interest expense 3,000
Depreciation expense (for tax purposes) 2,500
Other income (taxable) 5,000
Taxable income before deductions -
Current tax rate 30%
Unutilised tax credits from research and development (R&D) 1,200
Research and development expenditure 8,000
Dividends declared 4,000
Loans from directors (interest paid) 500
Allowance for bad debts 600

Additional information:

1. Depreciation on the straight-line method is applied to machinery and equipment valued at Sh.10,000,000. The useful life is 4 years.
2. The company qualifies for a 100% deduction on research and development costs incurred in renewable energy projects.
3. The interest paid on director loans is non-deductible for tax purposes.
4. The declared dividend is subject to withholding tax of 5%.
5. Only 50% of the provision is allowable as a deduction for tax purposes.
6. Other income includes gains from the sale of assets, which are taxable.
7. Additional tax relief on research and development investments is 10% of R&D costs.

Required:
(a) Prepare statement of profit or loss to determine the taxable income for Wasafi Solutions Ltd. for the year ended 31 December 2024. (8 marks)
(b) Determine the total current tax expense for the year ended 31 December 2024. (2 marks)
(c) Compute the net tax payable after accounting for tax credits and liabilities. (6 marks)
(d) Assess the impact of dividends on the overall tax liability for Wasafi Solutions Ltd. (4 marks)
(Total: 20 marks)

CA35P Page 8
Out of 9
QUESTION 25:
You are the audit senior in charge of the audit of Gamma Limited, a medium-sized retail company. The company has
implemented a new sales management system that tracks all sales transactions, including credit sales, returns, and collections.
As part of your audit of sales and accounts receivable for the first 3 quarters of the financial year 2024, you need to perform
various audit procedures using data analytics to test controls and detect any potential material misstatements.

Below is an extract of sales and receivables data for Gamma Limited for the year ended 30 September 2024:

Credit Amount
Sales Amount Terms Collected Discount Given
Invoice No. Customer Name Invoice Date (Sh."000'') (Days) Collection Date (Sh."000") (Sh."000")
INV001 Rho Inc 7/18/2024 15,000 30 9/18/2024 15,000 0
INV002 Rho Inc 5/16/2024 60000 45 - 800
INV003 Gamma Ltd. 8/26/2024 13,000 45 8/22/2024 9,000 1000
INV004 Delta Co 4/29/2024 5,000 30 6/3/2024 5,000 0
INV005 Alpha Ltd. 9/23/2024 7,500 30 9/29/2024 7,500 0
INV006 Alpha Ltd. 8/4/2024 12,500 30 -
INV007 Rho Inc 6/3/2024 5,700 45 -
INV008 Rho Inc 6/10/2024 8,500 45 8/13/2024 8,000 500
INV009 Rho Inc 5/6/2024 20,000 30 -
INV010 Beta Corp 8/8/2024 16,000 60 4/8/2024 15,500 500
INV011 Rho Inc 7/24/2024 15,000 60 -
INV012 Delta Co 4/12/2024 12,000 30 6/10/2024 11,500 500
INV013 Beta Corp 7/7/2024 20,000 60 8/12/2024 19,500 500
INV014 Gamma Ltd. 2/29/2024 71,000 30 3/3/2024 56,000
INV015 Beta Corp 1/28/2024 23,500 45 2/28/2024 24,000
INV016 Beta Corp 3/3/2024 19,000 45 -
INV017 Gamma Ltd. 3/22/2024 5,500 45 5/27/2024 7,800 150
INV018 Alpha Ltd. 2/12/2024 12,000 30 4/7/2024 10,000
INV019 Gamma Ltd. 1/15/2024 13,850 30 7/21/2024 13,000 800
INV020 Rho Inc 3/15/2024 7,900 30 -
INV021 Rho Inc 1/7/2020 2,800 45 1/9/2024 2,000 500

Additional information:
Where the collection dates are not indicated, collections are yet to be made.

Required:
(a) Conduct the below test of controls using Ms Excel to analyse whether Gamma Limited adheres to its credit terms: (6 marks)

(i) Extract/calculate using an Ms Excel function(s) the number of days between the Invoice Date and Collection Date
(Or today's date for cases where collection has not yet happened).

Note: Above formulae should be able to daily re-calcutate correctly the due days based on current date.

(ii) Using a formulae, create a status column that identifies any instances where collections are made beyond the
allowed credit period as 'Beyond' and those within the credit terms as "Within".

(iii) Use conditional formatting to highlight all details of overdue accounts (Apply a Yellow fill with bold red font)

(b) Using Excel, perform the following substantive tests on the accounts receivable balance: (5 marks)

(i) Create and calculate the amounts due by considering payments collected or offered discounts.

(ii) Compute the aging of accounts receivable based on days due to classify the accounts as below:

• Current - 30 days
• Due - 60 days
• Overdue - 90+ days overdue

(c) Using Ms Excel pivot tables, perform analytical procedures on sales and discounts given during the year: (6 marks)

(i) Prepare a monthly sales trend analysis using the invoice data.
(ii) Analyse the proportion of discounts given relative to total sales and flag any unusual trends using a pivot table or chart.
(iii) Prepare an appropriate chart from the resulting output in (c) (i) above and comment on the trend.

(d) Audit Report. (3 marks)

Draft a brief audit report summarising the results of your testing, highlighting any compliance or control weaknesses identified during your audit.

(Total: 20 marks)

CA35P Page 9
Out of 9