MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY
P.O. Box 972-60200 – Meru-Kenya
Tel: 020-2069349, 061-2309217. 064-30320 Cell phone: +254 712524293, +254 789151411
Fax: 064-30321
Website: www.must.ac.ke Email: info@must.ac.ke
University Examinations 2016/2017
THIRD YEAR SECOND SEMESTER SPECIAL/SUPPLIMENTARY EXAMINATION
FOR THE
DEGREE OF BACHELOR OF COMMERCE
BFC 3427: ADVANCED FINANCIAL REPORTING
DATE: OCTOBER 2017 TIME: 2 HOURS
INSTRUCTIONS: Answer question one and any other two questions.
QUESTION ONE (30 MARKS)
a) The following financial information relates to Jasho ltd a company quoted in the stock
exchange for the year to 30th June 2017
Shs million
Purchase of raw materials 10200
Turnover 25160
Salaries and wages 6800
Taxation for the year 2040
Dividends 816
Depreciation 1360
Water power and insurance 2040
Finance charge on leases 680
Required:
Prepare value added statement for the period to June 30th 2017 (10 marks)
b) Discuss the merits of including the value added statement in the annual financial reports
of a company (5 marks)
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c) Turambu ltd is a globally competitive group of companies with head office in Nairobi but
with subsidiaries in Kampala, Iringa, Maputo and Kigali. The holding company
assembles cars in Nairobi while subsidiaries deals with the following
Subsidiary Location Products
Value ltd enterprises kampala –Uganda paper and sanitary
Tumbu progressive ltd Iringa –Tanzania Textiles
Tura ltd Emporium Maputo –Mozambique fashion and garments
Rambu ltd Kigali-Rwanda house hold cutleries and
equipments
Turambu ltd directors did acquire these subsidiaries in order to diversify their product
portfolios but do not have any knowledge on information required for financial reporting
purposes though they were of statutory requirements
Required:
i. Explain to Turambu directors the purpose of segmental reporting (5 marks)
ii. Advise the directors of Turambu ltd the nature and information which should be
disclosed in the financial statements (5 marks)
iii. Explain to Turambu ltd directors the criteria used to identify separate reportable
segments (5 marks)
QUESTION TWO (20 MARKS)
The accounts of Besiri ltd other financial information are summarized as shown below.
Statement of financial position as at 30th 2017
Shs 000
Non current Assets (NBV) 9600
Current Assets 75300
Total Assets 84,900
Financed by
Ordinary shares shs 5 each per value 12,000
Revenue rexerves 8290
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Share premium 7500
5% convertible preference 10000
Shares shs 5 each per value
10% convertible debentures 15,000
Current liabilities 32,110
Total shareholders funds and liabilities 84,900
Market value of ordinary shares shs 20
Result for the year to 30.4.17 shs 000
Sales 398,940
Net profit after tax 16,079
Interest payable 1500
Taxation 6570
Dividends are in 2250
Notes
1. In addition to cash dividends of 2,250,000 ordinary shareholders were also given shares
bonus dividend of one share of every 100 shares held at the close of books on
31.17.2017
2. Debentures are in multiples of shs 10,000. For every shs 10,000 debentures multiple is
converted into 1000 ordinary share. At time of issue on 1.5.16 each debenture multiple
issue had 100 ordinary shares warrant options granted at shs 10 per share option.
Preference shares are to be converted in the ratio of 2:1 i.e 2 preference shares
convertible to one ordinary share
3. During the year to 30.4.17 company had devised a strategy of retaining its managers, in
which 2% of profit after tax would be set aside and granted as share options to managers
at shs 10per option, subjects to managers attaining a net profit after tax of 15 million and
above
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Required:
a) Computer earning per share (5 marks)
b) Dilute earnings per share (10 marks)
c) Critically examine and explain with clear illustrations why a debenture holders
earning interest at 15% p.a would opt to convert debt into equity even if the return on
equity is at 10% (5 marks)
QUESTION THREE (20 MARKS)
On 1.1.2014 Alpha ltd acquired 80% of the equity holding in Gama ltd for shs 700 million when
the Gama revenue revenues were shs.100 million
On the same date Gama ltd acquired 90% of the equity holdings in Omega ltd for shs. 450
million. When the revenue reserves of omega were shs 85 million
On 1.1.16 Omega ltd acquired 85% of equity holdings in Beta ltd for shs 400 million when the
retained earnings were shillings 125 million
The following information was extracted from the books of Alpha and its subsidiaries as at
31.12.16
Alpha ltd Gama ltd Omega ltd Beta ltd
Assets shs million shs million shs million shs million
Non current Assets (NBU) 1000 900 700 700
Current Assets 400 350 200 500
Investment subsidiaries 700 450 400 -
2100 1600 1300 1200
Ordinary shares 900 500 400 500
Share premium 70 200 150 -
Revenue reserves 300 200 150 200
8% redeemable reference shares 200 100 200 300
15% debentures 300 250 100 -
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Current liabilities 330 350 200 200
2100 1600 1300 1200
Notes
4. No shares have been sold by either Alpha Ltd or by any of its subsidiaries
5. As at 31.12.16 goodwill was tested for impairment and it was found out each year since
2014, good will lost 10% of its value on account of impairment. No entries on goodwill
impairment has been made in the books of account
Required:
a) Consolidated statement of financial position of Alpha group of companies as at
31.12.2016 (8 marks)
b) Discuss some of the reasons as to why corporate entities prefer to combine with others
through acquisitions of equity share holding than by way to joint ventures (2 marks)
c) Distinguish between preacquisition profits and post acquisition profits explain how they
are reported in the consolidated statement of financial position
d) With reference to companies Act, section 154, explain the basis upon which a limited
company can be deemed to be subsidiary of another company (3 marks)
e) Explain the rationale for preparing group accounts (3 marks)
QUESTION FOUR (20 MARKS)
a) Sama Ltd acquired a commercial vehicle for shs 900,000 on 1.1.15 company policy is
depreciated on a straight line basis at 20% with zero residual value
On 31.12.16 an impairment review was carried out which showed that the vehicle had a
recoverable amount of shs 500,000
Required:
Compute the impairment loss on the motor vehicle (3 marks)
b) Njama ltd carries out a review of its assets at the end of every year. The following details
were relevant for the period ending 31st December 2016
Cost depreciation selling price cost to sell economic value
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Assets shs 000 shs 000 shs 000 shs 000 shs 000
Land 700 0 1000 50 1,100
Furniture 100 35 70 5 50
Buildings 300 10 290 10 270
Motor vehicles 200 50 175 10 190
Compute for each asset
i. Carrying amount (4 marks)
ii. Recoverable amount (4 marks)
iii. Impairment (3 marks)
c) Explain the factors that can impair goodwill, immediately after the acquisition of a
subsidiary company (4 marks)
d) Explain the position of IFRS 3 and IAS 36 with regard to impairments of assets
(2 marks)
QUESTION FIVE (20 MARKS)
The following are drafts statements of income of Mutindwa ltd its subsidiary Nkubu ltd and its
associated company Timau ltd for the year ended 31st December 2016
Mutindwa ltd Nkubu ltd Timau ltd
Shs million shs million shs million
Turnover 4620 2100 1600
Net trading profit before tax 510 195 200
Dividends receivable 62.00 - -
Total comprehensive
Income before tax 572.00 195 200
Taxation 195.00 75 80
377.00 120 120
Proposed dividends 200.00 55 70
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Retained profits 177 65 50
Notes;
1. Mutindwa ltd acquired 75% of the equity holding of Nkubu ltd on 1.5.2016 on 1.1.16
Mutindwa ltd acquired 30% of the equity holding of Timau ltd. a director of Mutindwa
was appointed to the board of directors of Timau ltd and was very active in its
management
2. Intercompany sales from Mutindwa ltd to Nkubu ltd in 2016 were shs 720 million of
which shs 108 million remained in stock as at 31.12.2016. Mutindwa ltd profit margin on
these goods was 25% of the selling price
3. Mutindwa policy is to make full provision in the consolidated accounts for unrealized
intergroup profit without reference to non controlling interest
Required:
a) Prepare consolidated statement of comprehensive income for Mutindwa group of
companies for the year to 31st December 2016 (10 marks)
b) Explain, critically the difference between a subsidiary and an associate. How are they
different from a joint venture in terms of accounting treatment and financial reporting
of results? (6 marks)
c) Despite the absence of control, corporate entities still prefer to combine through
associate companies. Why? Explain (4 marks)
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