Advanced Accounting 2a

UNIVERSITY EXAMINATIONS: 2020/2021
SCHOOL OF BUSINESS & PUBLIC MANAGEMENT

ORDINARY EXAMINATION FOR BACHELOR OF COMMERCE
ACC 3207: ADVANCED ACCOUNTING 2
(EVENING)
DATE: APRIL, 2021 TIME: 3 HOURS
INSTRUCTIONS: Answer all questions
QUESTION ONE
Rex Ltd. A company quoted in the Nairobi Securities Exchange, acquired 80% of shares in Tex
Ltd. A company situated in a foreign country, Makee whose currency is Msh. Rex Ltd. acquired
Tex Ltd. on 30 April 2019 for Ksh.440 million when the retained profits of Tex Ltd. were Msh
1220 million. The following financial statements relate to the two companies.
Statement of financial position as at 31 December 2020

Rex Ltd Tex Ltd
Ksh. ‘million’ Msh ‘million’
Non Current assets
Property, plant and equipment 1890 3780
Investment in Tex Ltd 540 -
Net current assets: 2940 1290
Payables (1500) (2230)
3870 2840
Share capital 1380 480

Share premium 700 160
Retained profits 1790 2200
3870 2840
Statement of profit and loss for the year ended 31 December 2020
Rex Ltd Tex Ltd
Ksh. ‘million’ TR ‘million’
Turnover 3300 6120
Cost of sales (1890) (5100)
Gross profit 1410 1020
Administrative and distribution cost (840) (102)
Income from Tex Ltd. 16 -
Interest payable (44) (102)
Operating profit before tax 510 816
Taxation (158) (153)
Profit on ordinary activities after tax 352 663
Dividends paid (40) (104)
Retained profits for the year. 312 559
Additional information:
1. During the year, Tex Ltd. sold goods to Rex for Msh 104 million and made a profit of Msh
26 million on the transaction. All of the goods, which were exchanged on 30 June 2020
remained unsold at the year end. At 31 December 2019 there were goods sold by Tex Ltd. to
Rex Ltd held in the stock of Rex Ltd. These goods were valued at Ksh.12 million on which
Tex Ltd. made a profit of Ksh.4 million.
2. Tex Ltd. paid dividend for the year ended 31 December 2019 on 30 June 2020.
3. The fair value of the net assets of Tex Ltd. at the date of acquisition was Msh 1,040 million.
The fair value increment all due to Property, plant and equipment has not however been
incorporated in the books of Tex Ltd.
4. Goodwill is to be impaired at the rate of 30%
5. Property, plant and equipment is depreciated over five years on a straight-line basis with
a full year’s charge provided in the year of acquisition.
6. A loan of Ksh.50 million was raised by Tex Ltd. From Rex Ltd on 31 May 2019. The
loan is interest free and is repayable in 2019. The loan is included in the cost investment
in Tex Ltd. An amount of Msh 65 million had been paid to Rex Ltd on 31 December
2020 in part settlement on the loan. The amount had not been received by Rex Ltd. and
had not been included in its financial statements as at 31 December 2020.
7. The following exchange rates are relevant for translation:
Msh to the K Shilling:

30 April 2019 4.0
31 December 2019 4.6
1 January 2020 4.7
31 May 2020 5.3
30 June 2020 5.2
31 December 2020 5.0
Weighed average for 2020 5.1
Required:
(a). Consolidated statement of profit and loss as at 31 December 2020 (10marks)

(b). As the head of financial Reporting at Rex group, you are responsible for presenting the
financial statements to the board of directors. Prepare a presentation discussing the provisions of
IAS 21 on the treatment of:
i) Intra group dividends
ii) intra group sale of inventory and PPE
iii) fair value adjustments
iv) intra group balances
v) Currency Translation Difference (10 Marks)
QUESTION TWO
The following data was obtained for the upper-income consumer price index in Nairobi:
June 2017 – 422

June 2018 – 488
June 2019 – 770
June 2020 – 988
October 2020 – 976.
The historical financial statements of Alitex Limited are as follows:
Statement of profit and loss for the year Statement of financial position as at 30 June
ended 20 June 2020
Sh. Sh. Sh. Million Sh. Million
million millio 2019 2020
n
Sales 800 Fixed Assets:
Opening stock 40 Cost 400 400
Purchases 425 Depreciation (80) (120)
465 Current Assets:
Closing stock (60) 405 Stock 40 60
Gross profit 395 Debtors 90 132
Administration, selling & (200) Cash 12 18
distribution 142 210
Depreciation (40) Current Liabilities:
Loan Interest (50) Creditors 24 36
(290) Proposed dividend 20 25
Net Profit 105 44 61
Taxation 44 Net current assets 98 149
Profit after taxation 61 418 429
Dividends Ordinary share capital 100 100
Interim paid (25) Profit & Loss 18 129
Account
Final Proposed (25) (50) Shareholders’ Funds 218 229
Retained Profit for the year 11 Medium Term loan 200 200
418 429
Notes:
1. The company was formed on 1 July 2017: all the fixed assets were purchased on that date; 10
million Ordinary Shares of Sh.10 each were issued on that date; a loan of Sh. 350 million was
raised on that date, but Sh. 150 million has been repaid between 1 July 2017 and 30 June 2018.
2. Stock represents 1½ months purchases; all sales are on credit terms – debtors are given 2 months
credit; all purchases are on credit terms – creditors give 1 month credit.
3. Interest is paid in 2 equal instalments, on 30 December and 30 June each year.
4. Taxation is computed on the current year basis and is paid: 50% on 31 December 25% on 31
March and 25% on 30 June.
5. The Interim Dividend was paid on 31 March 2020
6. Other items of income and expense (as appropriate) arise evenly over the year.
Required:
a) By use of necessary computations, discuss the impact of the consumer price indices on
the performance and position of the business as at 30 June 2019 and 2020. (12 Marks)
b) There has been arguments raised on whether to account for inflation by use of the Current
Cost Accounting method or the Current purchasing power method. Advice the board of
Alitex limited on the best method to use (8 Marks)
QUESTION THREE
a) You have been called upon to make a presentation to the members of the finance team
in your organization about earnings per share and the disclosure provisions as per IAS
33. Discuss the matters you will include in your presentation (5 Marks)
b) Annex LTD has been facing financial difficulties in the past few years. The
management of the entity are considering either a capital reduction or a capital
reconstruction. There is a division in the management team with one group claiming
that Capital reconstruction and capital reduction refer to the same thing while the
other group claims there is a difference between the two. You have been called upon
as the chief accountant to help resolve the stalemate. Giving clear illustrations,
explain to the board whether there is a difference between capital reduction and
capital reconstruction. (5 Marks)

Advanced Accounting 2a

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UNIVERSITY EXAMINATIONS: 2020/2021

SCHOOL OF BUSINESS & PUBLIC MANAGEMENT

INSTRUCTIONS: Answer all questions

Statement of financial position as at 31 December 2020

Share capital 1380 480

Msh to the K Shilling:

(a). Consolidated statement of profit and loss as at 31 December 2020 (10marks)

June 2017 – 422

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