WEEKLY ASSIGNMENT
WEEK 13
PRINT, WORK AND SUBMIT YOUR ASSIGNMENT AT NEXT LECTURE
(Ignore assignment for courses you have not registered)
1.1 FINANCIAL ACCOUNTING
ASSIGNMENT 9
1 a. The accountant of Best Buy Ltd has begun preparing financial statements for the year ended 31stDecember 2015, but the work is not yet complete. At this stage, the items included in the trial balance are as follows:
GHȼ’000 GHȼ’000
Land 150
Buildings 160
Motor vehicles 130
Accumulated depreciation 220
Share capital 100
Retained earnings 80
Receivables 80
Payables 60
Inventories 50
Operating profit 40
Debentures (15%) 80
Allowance for receivables 5
Bank balance (asset) 12
Suspense 3 -
585585
The following additional information is relevant:
i) Sales for the year ended 31st December 2015 had been overcast by GHȼ2,300.
ii) A credit note for GHȼ3,500 for goods returned to Abu, a supplier, had not been posted to the suppliers account.
iii) Discounts received of GHȼ1,400 had been posted to the debit side of the discounts allowed account.
iv) A credit purchase from Manu of GHȼ640 had not been entered in the books.
v) A new motor vehicle purchased for GHȼ14,000 had been recorded as a motor expense. Depreciation has been correctly entered in the accounts.
vi) The debentures were issued three months before the year end. No entries have been made as regards interest.
vii) A dividend of 5 per cent of share capital was declared before the year end, but not paid until after the year end.
Required
a) Prepare journal entries with narratives to correct each of the errors in notes (i) to (v) above.(7 marks)
b) Prepare a statement to show the revised operating profit.(4 marks)
c) Prepare for Best buy Ltd for the year ended 31stDecember 2015
i) Statement of profit or loss for the year. (2 marks)
ii) Statement of Financial Position for the year end. (7)
b. The cash book of Lexis Limited as at 31 December 2016 discloses a balance of GH¢18,450 which did not agree with the bank statement balance. Investigation revealed the following:
•Cheques received of GH¢52,000, GH¢5,000 and GH¢12,450 were still in the business drawer. GH¢1,200 and GH¢1,800 standing orders for the payment of Electricity charges and Insurance respectively were paid by the bank but this has not been recorded in the cash book of Lexis Limited.
•The bank charged GH¢150 for a cheque book issued to Lexis Ltd.
•The bank has wrongly debited a cheque of GH¢4,955 into Lexis Ltd account which should have been placed in another customers account.
•A credit transfer of GH¢5,000 had been made in favour of Lexis Ltd. The transfer has not been recorded in the cash book.
•A cheque of GH¢70,000 drawn by Lexis limited was correctly entered in the cash book but debited to the bank statement as GH¢7,000
•The following cheques which were paid in November 2016 had not been presented :
GH¢
00001142 2,000
00001168 5,000
00001190 4,655
Required:
Prepare
i)The adjusted cash book. (4 marks)
ii)A statement to reconcile the balance in (i) above to the bank statement balance.
(6 marks)
1.2 QUANTITATIVE TOOLS IN BUSINESS
ASSIGNMENT 9
a) Distinguish between the following terms as used in probability:
i) Independents Events and Dependent Events. (2 marks)
ii) Mutually exclusive Events and Exhaustive Events. (2 marks)
iii) Marginal Probability and Joint Probability. (2 marks)
b) Mr Agbagba, an ICAG qualified member and his wife an ICAEW qualified member attended an interview for two vacancies for the post of College Finance Officer at a Private University. The probability of the interview panel selecting the man is 1/7 and that of the wife is 1/5.
Required:
Assuming the event selecting a man and selecting a woman are independent, determine the probability that;
i) both of them will be selected, (3 marks)
ii) only one of them will be selected, (3 marks)
iii) none of them will be selected. (3 marks)
c) If selected by the panel the probability that an ICAG qualified member will remain with the Private University is 0.6, and the probability that a Chartered Accountant earns more than GH¢5,000.00 per month in the university is 0.5. If the probability that Mr Agbagba will remain with the university or he will earn more than GH¢5,000.00 per month is 0.7;
Required:
Calculate the probability that he will earn more than GH¢5,000.00 per month given that he is a Chartered Accountant who will stay with the university.
(5 marks)
(Total: 20 marks
1.3 BUSINESS AND CORPORATE LAW
ASSIGNMENT 9
Please note: Students are expected to attempt all questions before coming to class on Saturday. A written copy of answers is expected from each student before the start of class.
Students are expected to be in class on or before 7:30 am to enable us have time to answer all the assignment questions as well as covering the topic for the day.
- Explain the nature of a company limited by guarantee (10 marks)
- Outline the procedure for the conversion of a company limited by shares into a company limited by guarantee (10 marks)
- Outline the procedure for the removal of an auditor? (20 marks)
- Explain what is a partnership formed under Act 152 (20 marks)
- Subject to any agreement, explain the rules that apply to a partnership.(20 marks)
2.1 FINANCIAL REPORTING
ASSIGNMENT 9
a) With reference to IFRS 10 ‘Consolidated Financial Statements’, a parent need not present consolidated financial statements if it meets some FOUR conditions.
Required
Outline these FOUR conditions.
b) On 1 January 2014 Fumba Ltd acquired the following non-current investments in the capital market:
i) 3 million of the 4 million equity shares in Kamara Ltd by an exchange of one share in Fumba Ltd for every two shares in Kamara Ltd plus GHS1.25 per acquired Kamara Ltd’s share in cash. The market price of each Fumba Ltd’s share at the date of acquisition was GHS6.00 and the market price of each Kamara Ltd’s share at the date of acquisition was GHS3.25.
ii) 30% of the 4 million equity shares of Weah Ltd at a cost of GHS7.50 per share in cash.
Only the cash consideration of the above investments has been recorded by Fumba Ltd. In addition GHS500,000 of professional costs relating to the acquisition of Kamara Ltd are also included in the cost of the investment. The summarised draft financial statements of the three companies at 31 December 2014 are:
Statement of profit or loss and other comprehensive income for the year ended 31 December 2014
Fumba Kamara Weah GHS’000 GHS’000 GHS’000
Revenue26,0009,00016,000
Cost of sales(13,000)(4,000) (10,000)
------
Gross profit13,0005,0006,000
Operating expenses(2,000)(1,400)(100)
Other income: Profit on sale of plant 500
------
Earnings before interest and tax11,5003,6005,900
Finance costs(1,250)(200)(100)
------
Profit before tax10,2503,4005,800
Taxation(1,400)(500)(800)
------
Profit for the year8,8502,9005,000
Other comprehensive income 400
------
Total comprehensive income9,2502,9005,000
======
Fumba KamaraWeah GHS'000 GHS'000 GHS'000
Non-current assets
Property, plant and equipment 18,400 10,400 18,000
Investments Kamara and Weah 13,250 nil nil
Investments in Other Securities6,500 nil nil
------
38,150 10,400 18,000
Current assets
Inventory 6,900 6,200 3,600
Trade receivables 3,200 1,500 2,400
------
Total assets48,250 18,100 24,000
======
Equity and liabilities
Stated capital 10,000 4,000 4,000
Revaluation Reserve 400
Income surplus 24,8508,90016,000
------
35,250 12,900 20,000
Non-current liabilities
7% Loan notes 5,000 1,000 1,000
Current liabilities 8,000 4,200 3,000
------
Total equity and liabilities 48,250 18,100 24,000
======
The following information is relevant:
(i) At the date of acquisition Kamara Ltd had five years remaining of an agreement to supply goods to one of its major customers. Kamara Ltd believes it is highly likely that the agreement will be renewed when it expires. The directors of Fumba Ltd estimate that the value of this customer based contract has a fair value of GHS1,000,000 and an indefinite life and has not suffered any impairment.
(ii) On 2nd January 2014, Fumba Ltd sold an item of plant to Kamara Ltd at its agreed fair value of GHS2,500,000. Its carrying amount prior to the sale was GHS2,000,000. The estimated remaining life of the plant at the date of sale was five years (straight-line depreciation).
(iii) During the year ended 31 December 2014 Kamara Ltd sold goods to Fumba Ltd for GHS2,700.000. Kamara Ltd had marked up these goods by 50% on cost. Fumba Ltd had a third of the goods still in its inventory at 31 December 2014. There were no intra-group payables/receivables at 31 December 2014.
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(iv) Impairment tests on 31 December 2014 concluded that neither consolidated goodwill nor the value of the investment in Weah Ltd were impaired.
(v) The investments in other securities are included in Fumba Ltd’s statement of financial position (above) at their fair value on 1 January 2014, but they have a fair value of GHS9,000,000 at 31 December 2014. The securities are designated as ‘available for sale financial assets’
(vi) No dividends were paid during the year by any of the companies.
(vii) It is the group policy to value non-controlling interest at acquisition at full (or fair) value. For this purpose the share price of Kamara Ltd at this date should be used.
Required
i)Prepare the consolidated statement of profit or loss and other comprehensive income for Fumba Ltd’s group for the year ended 31 December 2014
ii) Draft the consolidated statement of financial position as at 31 December 2014
MANAGEMENT ACCOUNTING
ASSIGNMENT 9
Question 1
a. In setting transfer prices, one must balance the need for divisional autonomy with the desire to achieve goal congruence
Required: Explain how transfer pricing system can defeat or engender divisional autonomy and achievement of goal congruence 5 marks
b. Explain three advantages and two disadvantages of using transfer pricing system within an organisation 5 marks
Question 2
Barbie Ltd has two divisions; Trace and Hilux. The following is an extract from the annual report for the 2017 financial year.
Trace GHC / HiluxGHC
Profit before depreciation
Depreciation
Non-current assets
Current Assets
Current Liabilities / 450,000
120,000
1,200,000
750,000
350,000 / 620,000
130,000
1,300,000
1,000,000
400,000
The company’s cost of capital is 20%.
Required:
(i)Using Return on Investment(ROI) and Residual Income, comment on the performance of the divisions.
(ii)The Hilux branch intends to sell one of the non-current assets with book value of GHC120,000 and make a profit of GHC60,000. Trace also wants to acquire another asset costing GHC90,000 that will generate a profit of GHC40,000. To what extent will the decisions affect the performance of the divisions?
(12 marks)
b. Explain three non-financial measures of performance and for each measure, relate a key performance indicator. 6 marks
2.3 AUDIT AND ASSURANCE
ASSIGNMENT 9
Q1. ISA 402 Audit considerations relating to an entity using a service organization provides guidance to auditors whose clients use service organisations.
Required
Explain the term service organisation and the auditor’s responsibilities in relation to understanding the services provided by the service organization.
Q2. Describe the factors that an auditor need to consider before relying on the work of an expert.
Q3. As the external auditor of Chillin Ltd, you realized that the work of an expert engaged by your client does not provide sufficient, appropriate audit evidence and is inconsistent with other audit evidence available to you
Required
Explain the actions you would take as the auditor to address this challenge
2.4 FINANCIAL MANAGEMENT
ASSIGNMENT 9
1. Kaluu Ltd is a listed company on the Ghana Stock Exchange Market and showed the following performance. The following information was made available to you:
Current market price per share (as at 31/12/15) GH¢ 10
Dividend per share 2015 GH¢ 1
Expected growth rate of dividend 20% per annum
The average market returns 27%
The risk free government rate 24%
The beta factor of Kaluu Ltd 1.4
Required:
a) What is the estimated cost of equity using the dividend growth model? (3 marks)
b) What is the estimated cost of equity using the Capital Assets Pricing model? (3 marks)
2. Five years ago, Gasoto Ltd. issued 12 per cent irredeemable debentures at their par value of GH¢100. The current market price of these debentures is GH¢94. The company pays corporation tax at a rate of 30 per cent.
Required:
Calculate the company’s current cost of debenture. (3 marks)
3.
Pusher Mining Ltd, a large listed company, operates five mineral concessions in Ghana and Ivory Coast. The company’s financial performance for the past five years has been impressive. The company’s recently published financial results indicate that it earned after-tax profit of GH¢250 million and paid dividends of GH¢50 million out of that profit.
Reserves at two of the five mineral concessions will be exhausted in two years’ time, and stakeholders fear this will adversely affect the company’s profitability. Nevertheless, the directors are aiming at maintaining the company’s dividend payment record. To achieve this, they want to pursue a new project in the oil industry to provide additional cash flows. Though the new project will be financed with existing equity and long-term debts, the directors are not sure what cost of capital to use in appraising the new project.
A summary of the company’s financial position before the new oil project follows;
GH¢mNoncurrent assets / 620
Current assets / 425
Total assets / 1045
Equity:
Stated capital / 180
Income surplus / 685
Shareholders' fund / 865
Liabilities:
Current liabilities / 20
Bank loans / 40
Bonds / 120
Total liabilities / 180
Total equity and liabilities / 1045
EXCEL PROFESSIONAL INSTITUTE
Notes:
1. Stated capital: Pusher has in issue 40 million ordinary shares of no par value, all of which are listed on the stock exchange. The current market value of the ordinary stock is GH¢5.5 per share. It is estimated that the market value of the ordinary stock will increase by 8% per annum. The equity beta is 1.25.
2. Bank loans: These are fixed rate loans from banks in Ghana. The after-tax cost of the loans is 14.5%.
3. Bonds: These are 16% coupon bonds with face value of GH¢100 each. The bonds are currently trading at GH¢98.1 each. In 10 years’ time, the bonds may be either converted into 10 ordinary shares or redeemed at face value at the choice of bondholders. Bondholders are assumed to be rational investors.
If the new oil project is implemented, Pusher Mining Ltd.’s main competitor in the oil industry would be Cargo Oil Ltd. The estimated equity beta of the competitor is 1.80 and the market value of its equity stock is GH¢150 million. The long-term debt stock of the competitor is valued at GH¢100 million. The systematic risk of debt stocks is assumed to be zero. The risk-free return is 14% and the market return is 20%. The corporate tax rate is 25%.
Required:
Estimate the appropriate cost of capital Pusher Mining Ltd should use in appraising the new project in the oil industry. Show all relevant computations. (11 marks)
2.5. PUBLIC SECTOR ACCOUNTING
ASSIGNMENT 9
a) The Minister of Finance has recently called on Citizens not to be Spectators but participate in the art of governance by demanding accountability from duty bearers and public officers.
Required:
Explain FIVE ways in which duty bearers and public officers can ensure public accountability in the management of Public Funds.
b) Public-Private Partnership (PPP) has been identified as a good source of mobilizing resources to support development at both national and substantial levels. Before approvals of Public Private Partnerships (PPPs) are considered by governments, there are many important economic, social, political, legal, and administrative aspects, which should be carefully assessed. PPPs have various limitations which should be taken into accounts while they are being considered.
Required:
i) Identify FOUR of such limitations.
ii) Identify and explain FOUR different types of PPP arrangements a public sector institution can enter into allowable by the PPP regulations of Ghana.
1.6CORPORATE STRATEGY, ETHICS AND GOVERNANCE
ASSIGNMENT SET 9
- Explain the concept of business ethics
- There are a number of approaches that are used to explain ethical conduct of employees. Explain the three (3) basic approaches to ethical behaviour.
- Explain three (3) reasons why investors prefer to invest in organisation that practice good corporate governance principles. (6 marks)
3.1 CORPORATE REPORTING
ASSIGNMENT 9
The following draft statements of financial position relate to Diamond, Spade and Club, all public listed entities, as at 31 March 2017.
Diamond Spade Club
¢m ¢m¢m
Assets
Non-current assets
Property, plant and equipment 1,062 1,210 1,265
Investments in subsidiaries
Spade 1,140
Club 928
Investment in Heart 68
Other financial assets 190
–––––– –––––– ––––––
3,388 1,210 1,265
Current assets: 885 782 224
–––––– –––––– ––––––
Total assets 4,273 1,992 1,489
–––––– –––––– ––––––
Equity and liabilities
Equity share capital (¢1 each) 1,650 720 700
Retained earnings 1,180 880 364
Other components of equity 128 78 59
–––––– ––––––––––––
Total equity 2,958 1,678 1,123
–––––– –––––– ––––––
Non-current liabilities 1,143 189 172
Current liabilities 172 125 194
–––––– ––––––––––––
Total liabilities 1,315 314 366
–––––– –––––– ––––––
Total equity and liabilities 4,2731,9921,489
The following information is relevant to the preparation of the group financial statements:
1. On 1 April 2016, Diamond acquired 70% of the equity interests of Spade paying cash of ¢1,140 million.
At 1 April 2016, the retained earnings and other components of equity of Spade were ¢780 million and
¢64 million respectively.
The fair value of the identifiable net assets of Spade at 1 April 2016 was ¢1,600 million. It is group policy to value non-controlling interests at fair value and, at the date of acquisition, this was ¢485 million. The excess in fair value of the identifiable net assets is due to non-depreciable land.
2. On 1 April 2015, Diamond acquired 40% of the equity interests of Club for cash consideration of
¢420 million. At this date the carrying amount and fair value of the identifiable net assets of Club was
¢1,032 million. Diamond treated Club as an associate and equity accounted for Club up to 31 March 2016.
On 1 April 2016, Diamond took control of Club, acquiring a further 45% interest for cash of ¢500 million
and added this amount to the carrying amount of its investment in Club. On 1 April 2016, the retained earnings and other components of equity of Club were ¢293 million and ¢59 million respectively and the fair value of the identifiable net assets was ¢1,062 million. The difference between the carrying amounts and the fair values was in relation to plant with a remaining useful life of five years. The share prices of
Diamond and Club were ¢5 and ¢1·60 respectively on 1 April 2016. The fair value of the original 40% holding and the fair value of the non-controlling interest should both be estimated using the market value of the shares.
3. Diamond has owned a 25% equity interest in Heart for a number of years. Heart had profits for the year ended 31 March 2017 of ¢20 million which can be assumed to have accrued evenly. Heart does not have any other comprehensive income. On 30 September 2016, Diamond sold a 10% equity interest for cash of ¢42 million. Diamond was unsure of how to treat the disposal and so has deducted the proceeds from the carrying amount of the investment at 1 April 2016 which was ¢110 million (calculated using the equity accounting method). The fair value of the remaining 15% shareholding was estimated to be ¢65 million at