financial accounting practice may 2009

7/27/2019 Financial Accounting Practice May 2009

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QUESTION 1

The trial balance below was extracted from the records of Quality Commercial Bank Limited as at

31 December 2008.

DR

GH000

CR

GH000

Interest on short term funds

Interest on Investment SecuritiesInterest on loans and advances to customers

Interest on customers deposits

Commissions and feesGains on foreign currency translation and conversion

Dividends from Investments

Staff Remuneration and benefitsAdministrative and sundry operating expenses

Directors emoluments

Provision for doubtful debts 1 January 2008Sundry income

Corporate income taxIncome surplus 1 January 2008

Capital surplus 1 January 2008Statutory reserve fund 1 January 2008

Stated capital (20 million ordinary shares)

Interim dividend paidCash on hand

Balances with Bank of Ghana

Government SecuritiesDue from other banks

Overdrafts, loans and advances

Investment in equity securitiesAccounts receivable and prepayments

Land and buildings

Computers and equipment

Motor vehiclesAcc. Depreciation 1/1/08: Land and Buildings

Computers and Equipment

Motor vehiclesCustomers deposits

Deposits from other banks

Expense creditors and accruals

170,000

323,000176,000

3,000

5,000

4,00069,000

610,000

2,185,000370,000

3,150,000

31,00090,000

77,000

162,000

9,000

________

7,434,000

30,000

364,000373,000

180,0008,000

5,000

282,00045,000

340,000

4,000125,000

20,000

18,000

60,000

4,0004,906,000

10,000

660,000

7,434,000

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The following notes are relevant

i. Property, Plant and Equipment are depreciated using the following rates:

Land and Buildings 2% on cost (up to the date of revaluation)Computers and Equipment 25% on cost

Motor vehicles 25% on cost

The Directors caused the land and buildings to be revalued on 1 July 2008. The valuersassigned value of GH100,000,000 and estimated remaining useful life of 40 years. The

valuation has not been reflected in the trial balance. The Directors wish to incorporate this

valuation in the 2008 final accounts.

ii. Included in the administrative expenses are finance lease rental payment of GH2,000,000

and Banking Software cost of GH50,000,000. The leasing rental of GH2,000,000 waspaid on 31 December 2008. It is the first of four annual payments in arrears for the rental of

motor vehicles which have a cash purchase price of GH7,000,000. The auditors have

advised that this is a finance lease and have recommended the use of sum of the years digitmethod in the allocation of the finance charge. The lease arrangement commenced on 1 st

January 2008.

Leased motor vehicles are depreciated over the lease period (on straight line basis, assumingnil residual value). The banking software was bought on 1 October 2008. It is to be

capitalised and amortised over two years on pro-rata basis.

iii. The corporate profit tax provision in the 2007 final accounts was GH85,000,000. This was

finalised with Internal Revenue Service at GH90,000,000, and fully settled in April 2008.

The tax provision for 2008 profit is to be made at GH60,000,000.

iv. Provision for doubtful debts is to be increased to GH380,000,000.

v. Provision to be made for Auditors Fees of GH8,000,000, and a final dividend of 10

pesewas per share.

vi. In compliance with the requirements of the Banking Act, 12.5% of profit after tax is to betransferred to Statutory Reserve Fund.

vii. In order to satisfy the Bank of Ghana minimum stated capital requirement the directors haverecommended a bonus issue of one share for each held to be credited at the current market

price of GH2.40 per share out of income surplus. The bonus shares should be reflected in

the 2008 financial statements but would not rank for dividend declared as in note v above.

You are required to

(a) Prepare Profit and Loss Account and Statement of Changes in Equity for the year ended 31st

December 2008 and a Balance Sheet as at that date in a format that accords with relevant

legislations and Financial Reporting Standards.

(18 marks)(b) State any four (4) Accounting policies adopted in preparing the Financial Statements.

(4 marks)

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(c) Prepare a Schedule to show the movement in Property, Plant and Equipment during the year.

(3 marks)

Total: 25 marks

QUESTION 2

Precious Jewels Enterprise started business on 1 January 2007 in Accra and simultaneously opened

a branch in Banjul, Gambia.

The presentation currency of Gambia is Dalasi (D).

The following are the trial balances of the Accra Head Office and the Banjul Branch Office as at 31December 2007.

Head Office Branch OfficeGH GH D D

Branch Current Accounts

Balance as at bankCreditors

Debtors

Fixed assetsHead office Current Account

Net profit for 2007

Capital Introduced

Stocks

130,000

21,000

37,000

80,000

52,000

320,000

42,000

106,000

172,000

______

320,000

132,000

320,000

290,000

238,000

980,000

185,000

633,000

162,000

______

980,000

Notes to the trial balance

(i) The Trial Balance of the Accra Head Office was prepared beforeany entries had been made in respect of any profits or losses of the branch.

(ii) Remittances from Head Office to Branch and from Branch to Head Office were recorded inthe financial records at the actual amount paid and received.

(iii) The fixed assets were all acquired on 1 January 2007.

(iv) As at 31 December 2007 there was a remittance in transit of D10,000 from Banjul to Accra.

This was received by Accra on 3 January 2008 and converted into GH2,500.

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(v) The rates of exchange applicable were:

On 1 January 2007 D5 = GH1

On 31 December 2007 D4 = GH1Average rate for 2007 D4.5 = GH1

(vi) The Branchs activities are directly linked to those of the Head Office and management, as a

policy, has adopted the temporal method of translation into reporting currency (ie the cedi).

You are required to prepare:

i) The Trial Balance of the Banjul Branch as at 31 December 2007 in Ghana cedis.

ii) The closing entries as at 31 December 2007 in the Branch Current Account in the books ofHead Office.

iii) A summary of the Balance Sheet of Precious Jewels Enterprise as at 31 December 2007.

15 marks

QUESTION 3

a) i) List and explain the three (3) constituents of Public Funds as defined in the

Financial Administration Act.

(6 marks)

ii) The current trend in public sector financial reporting is to move from Cash Based

Accounting to Accrual Based Accounting. Since application of pure accrual basedaccounting in the public sector seems extremely difficult, if not impossible, it is

being suggested that Ghana adopts Modified Accrual Based Accounting.

You are required to

Explain clearly the concept of Modified Accrual Based Accounting as applied in the public sector

financial reporting. (4 marks)

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b) Dzifa and sons Limited is an agro processing company operating at Axim. The companyspublished financial statements for the year ended 31 December 2008 is as follows:

Income statement for the year ended 31 December 2008

GH

Revenue

Cost of salesGross profit

Selling, general & administrative expenses

Profit before taxTaxation

Profit after tax

Income surplus

Balance at 1/01/08

Profit for the year

Dividend: Equity7% preference

Balance at 31/12/08

90,336

70,00220,334

4,520

15,8143,734

12,080

5,200

12,08017,280

(7,600)(3,150)

6,530

Balance Sheet as at 31 December 2008

GH

Non-current assets

Property Plant & EquipmentNet Current Assets

Financed by:Stated Capital:

Equity shares (issued at 50 pesewas per share)

7% preference shares (issued at 25 pesewas per share)

Income surplusShareholders funds

8% debentures

183,25016,750

200,000

95,000

45,000

6,530146,530

53,470

200,000

Additional information

Market price per equity share as at 31 December 2008 was 75 pesewas. (Note 100 pesewas = GH1).

You are required to calculate and explain each of the following:

i) Book value of net assets per share (3 marks)

ii) Earnings per share (3 marks)

iii) Earnings yield (3 marks)

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Additional information:

i. The partnership agreement provides that profits and losses including losses of capital nature

shall be shared as follows:

Dela 6: Zola 5: Max 4.

ii. The partners have agreed to take out as maximum cash as possible as and when assets arerealised.

iii. Dela and Zola took over some vehicles at an agreed valuation of GH5,000 each. Max alsotook over some computers and accessories at an agreed valuation of GH8,000 on 12

January 2009.

iv. On 23 January 2009 the rest of the vehicles were sold for GH69,000.

v. The rest of the plant & equipment were sold for GH192,000 on 1st February 2009. Half ofthe stocks realised GH175,000 on 25 February 2009. Selling expenses incurred amounted

to GH7,500.

vi. The freehold land & building were sold on 9 March 2009 for GH180,000. Creditorsaccepted the amount due them after allowing a discount of 5% on the total amount.

vii. Debtors paid their amounts in full on 3 April 2009 except Koo Kyei, who owed GH11,500.He was declared bankrupt on 6 April 2009.

viii. The rest of the stocks realised GH250,000 on 2 May 2009.

You are required to prepare:

I) A statement showing the distribution of cash to each of the partners and other stakeholders.

(12 marks)

II) The capital accounts to close the books of the firm. (4 marks) Total: 20 marks

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QUESTION 5

Your Chief Executive Officer (CEO) has been invited to attend a seminar on IFRS, by the Institute

of Directors. Among the Standards listed are:

IAS 10 Event occurring after the balance sheet date

IAS 12 Income TaxationIAS 37 Provisions, Contingent Liabilities and Contingent Assets

He has asked you, the Financial Accountant, to give him some pre-seminar brief on these Standards.

Required:

Write a short memorandum to the CEO in response to his request. The memo should be specific to

the following issues only.

i) IAS 10

Difference between adjusting post balance sheet event and non-adjusting post balance sheet

events, giving two (2) examples in each case. (5 marks)

ii) IAS 12

Definition of Deferred Tax Liability and Deferred Tax Asset and three (3) examples of

circumstances that give rise to taxable temporary differences. (5 marks)

iii) IAS 37

i) The difference between a liability and a provision. (2 marks)

ii) Definition of restructuring and any two (2) examples of events that may fall under

the definition of restructuring. (3 marks)

Total: 15 marks

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financial accounting practice may 2009

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