BCTA

Practice questions
BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

QUESTION 1 (30 MARKS)

Mathatha Telecommunications Network Limited (hereafter referred to as MTN) is the largest
telecommunications network in Southern Africa. The company was established in 19X4 at the rise
of democracy in Zimbabwe and was listed on the Zimbabwe Stock Exchange in 20X4. You have
been asked to assist the financial team with the following queries for the reporting period ending
31 March 20X7.
Issue 1
The capital structure of MTN for the current and prior year is as follows:
Authorised: 20X6 20X7
$ $
1 000 000 ordinary shares of no-par value 1 000 000 1 000 000
1 000 000 10% non-redeemable cumulative 1 000 000 1 000 000
preference shares
Issued:
700 000 (20X6: 700 000) ordinary shares 1 750 000 1 750 000
1 000 000 (20X7: 1 000 000) preference shares 1 000 000 1 000 000

You also obtained the following shareholder structure from the share register:
Beneficial Shareholders holding 5% or more of the Number % holding
ordinary share capital of shares
Modipadi Investment Holdings Limited 42 525 6.075%
Hlori Capital Property Limited 54 600 7.8%
Metsi Industrial Holdings Limited 135 000 19.29%
DLO Provident Fund 70 000 10%
Beneficial Shareholders holding 5% or more of the Number of Shares %
preference share capital

Sishen Equities Property Limited 68 000 6.8%

Metsi Industrial Holdings Limited 800 000 80%

• The remainder of the shareholders each hold less than 5% of the issued ordinary and
preference shares of the company. Ordinary shareholders are entitled to one vote for
each share held.
• The preference shares do not carry a vote, unless the preference dividend is in arrears
and remains unpaid and where any resolution is proposed at a shareholders meeting
which directly affects the rights attached to the preference shares. The preference
shareholders will be entitled to one vote for each preference share held if the voting
conditions become applicable.

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• MTN has had to pay a $9.5 million fine to Ethiopia as they failed to comply with the sim
card legislation in the country. As a result, MTN has not been able to pay the preference
dividend in the current year and they consider it unlikely that the preference dividend will
be paid in the next year.
• The overall decision making regarding the relevant activities of MTN are made by the
board of directors who are appointed by the shareholders at the annual general meeting.
The next annual general meeting will be held in Harare, Zimbabwe on September 20X7.
Issue 2
On 1 January 20X7, MTN purchased all of the assets and liabilities of Matheo Communications
(Pty) Limited (hereafter referred to as Matheo), a large consulting entity situated in
Johannesburg. Matheo is focused on providing consulting services to big corporations on
telecommunications matters. These assets and liabilities meet the definition of a business as
defined in IFRS 3 Business Combinations.
The financial manager of MTN, Mrs Dlamini, prepared the following working paper and notes to
account for the business combination. She has rounded all amounts to nearest Dollar and all
amounts are recognised at fair value unless otherwise stated.
Debit $ Credit $
Property, plant and equipment 1 4 750 000
Investment property 2 5 000 000
Intangible asset 3 4 600 000
Non-current asset classified as held for sale 4 1 751 900
Provisions 5 3 380 000
Long-term loan 5 3 998 449
Legal costs 6 55 231
Business combination loan 7 4 192 743
Gain on bargain purchase 8 4 585 940

Notes:
1. Included in the property, plant and equipment of Matheo are hand held devices that were
used by the consultants to provide a service for their clients. MTN intends to sell all these
devices as part of their normal operations. The fair value of the hand held devices at the
acquisition date amounted to $1 350 000.
2. Investment property relates to a building situated in Borrowdale Brooke that Matheo
currently rents to MTN. MTN has been using the building as their head office for their
operations in Zimbabwe and plan to continue to do so after the acquisition of Matheo.
3. The following intangible assets were identified during the due diligence performed on the
entity:

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• An internally generated customer list that is subject to strict confidentiality agreements

and therefore cannot be sold to third parties. The fair value of the customer list is $1 700
000.
• The remaining amount recognised relates to the fair value of the Matheo brand as it is a
renowned brand in the consulting industry.
4. MTN will continue with the plan to sell the assets classified as held for sale. The following
values are applicable as at the acquisition date:
• Carrying amount $ 981 000
• Fair value less cost to sell $1 700 000
5. The provisions and the long-term loan have been correctly measured at their acquisition
date fair values. Matheo is currently involved in a law suit against them by the
Competition Commissioner for alleged price fixing with fellow consulting firms. Although
the firm is guilty of such behaviour the lawyers considered an outflow of resources
embodying economic benefits remote. The fair value of the law suit at the acquisition
date was determined as $2 800 000. Mrs Dlamini did not recognise the contingent liability.
6. Legal costs relate to amounts paid to the lawyers to draft the acquisition contracts as well
costs paid to for the due diligence performed prior to the acquisition of Matheo.
7. The loan amount relates to the following obligations incurred by MTN for the acquisition
of Matheo:
• MTN obtained a loan from CBZ Bank on 1 January 20X7 for $3 million which incurs interest
at a rate of 10% per annum payable monthly for the next 5 years. The capital amount is
payable at the end of five years. A market related interest rate was determined as 11.5%
per annum. Mrs Dlamini therefore calculated the present value of the loan as follows:
N 60
I/Y 11.5%
FV 3 000 000
MTN transferred the $3 000 000 to the previous owners of Matheo at the acquisition date.

• MTN has agreed to pay an additional $2 500 000 should the profit generated from the
assets and liabilities acquired increase by more than 10% per year for two consecutive
years. The fair value of the obligation at the acquisition date amounted to $1 800 000.
8. The gain on bargain purchase is calculated as the balancing figure

REQUIRED:
You may ignore all Income Tax consequences for the purposes of answering QUESTION 1
a) Discuss, with reference to IFRS 10 Consolidated Financial Statements, who exercises
control over MTN Limited for the period ended 31 March 2017. (15)

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BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

b) Prepare the correcting journal entry that should be processed by MTN Limited in order to
account for the business combination with Matheo Communications (Pty) Limited as at 1
January 20X7.
• Your correcting journal entry should ensure that the classification of the assets and
liabilities are accurate.
• Include all journal narrations.
• Ignore taxation. (13)
Effective and efficient communication: (2)

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BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

SOLUTION
a) Discuss, with reference to IFRS 10 Consolidated Financial Statements, who (15)
exercises control over MTN Limited for the period ended 31 March 20X7.
An investor controls an investee when it is exposed, or has rights, to variable 1
returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee. [IFRS 10.6]
Thus, an investor controls an investee if and only if the investor has all the 1
following:
POWER OF THE INVESTEE
An investor has power over an investee when the investor has existing rights that 1
give it the current ability to direct the relevant activities, ie the activities that
significantly affect the investee’s returns. [IFRS 10.10]
An in-depth analysis of the relevant activities is not required, because the ultimate 1
direction of all activities is decided by the Board of directors who are appointed
by the majority shareholders.
The voting rights attached to the preference shareholders will be deemed to be 1
protective rights as the rights protect the interest of the preference shareholders
without giving them power over the investee.
At initial assessment the voting rights attached to the preference shareholders 1
would apply in the exceptional circumstances when the preference dividends are
arears. These rights would initially not result in the preference shareholders
having power over MTN.
IFRS 10 requires that an investor reassess whether they control an investee if facts 1
and circumstances indicate a change in one or more of the elements of control.
In the current year, the dividend due to the preference shareholders is in arrears 1
and therefore the preference shareholders are now entitled to participate in the
decision making related to the relevant activities of MTN.
Therefore, the preference shareholders have the practical ability to exercise their 1
right to vote in the current year (i.e. rights are now substantive).
The party with the majority of the voting rights (existing rights) is deemed to have 3
power over MTN and currently on assessment of the various shareholders the
following is evident:
Total available voting rights:
Issued (1) Ordinary shares: 700 000
Issued Preference shares 1 000 000
Total 1 700 000 (1)
Used on ISSUED shares and not authorised shares to calculate voting rights;
Voting rights based on BOTH ordinary and preference shares
Metsi Industrial Holdings Limited has the majority of the voting rights when 2
combining their share of the ordinary share capital with the preference share
capital:
Ordinary shareholding 135 000
Preference shareholding 800 000

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Total 935 000 (1)

Shareholding: 935 000/ 1 700 000= 55% (1)
EXPOSURE TO VARIABLE RETURNS
Metsi Industrial Holdings Limited is exposed to the variable returns from the 1
performance of MTN through the share of profits (dividends). Profits are variable
in nature.
LINK BETWEEN POWER AND RETURNS: PRINCIPLE-AGENCY SITUATIONS [IFRS 1
10.7]
An investor controls an investee if the investor not only has power over the 1
investee and exposure or rights to variable returns from its involvement with the
investee, but also has the ability to use its power to affect the investor’s returns
from its involvement with the investee. [IFRS 10.17]
Metsi Industrial Holdings Limited acts on their own behalf for their own benefit
and is therefore a principal and not an agent.
CONCLUDE: Metsi Industrial Holdings Limited therefore exercises control over 1
MTN.
COMMUNICATION: Layout of answer (power, returns, link, conclude) 1

b) Prepare the correcting journal entry that should be 13

processed by MTN Limited in order to account for the
business combination with Matheo Communications
(Pty) Limited as at 1 January 20X7.
• Your correcting journal entry should ensure
that the classification of the assets and liabilities
are accurate.
• Include all journal narrations.
• Ignore taxation.
Debit Credit
Inventory (SFP) 1 350 000 1
Property, plant and equipment (SFP) 1 350 000 1
Property, plant and equipment (SFP) 5 000 000 1
Investment property (SFP) 5 000 000 1
Intangible assets (SFP) 1 700 000 1
Legal costs (P/L) 55 231 1
Contingent Liability (SFP) 2 800 000 1
Loan (SFP) * 2 500 000/ 1
[4 192 743- 1 692 743] 4 192 743
Financial Liability (SFP) * 1 800 000 1
Loan * 1 307 257/ 1
[3 000 000- 1 692 743] 3 000 000
Gain on bargain purchase 4 585 940 1

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* Loan: Either derecognise full loan of $4.1m and recognise loan of $3m and cont consideration
(fin liability) at FV OR adjust for difference between loan CA and what CA should be ($2.5m and
$1.3m)
Calculate present value of the loan:
N=60; I/Y=11.5% (or 11.5%/12 if P/Y=1); FV=3 000 000; PV=1 692 743
OR
Loan amount given $4 192 743 LESS FV of the CL $ 2 500 000 = PV of Loan $1 692 743
COMMUNICATION: Journal narration 1

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QUESTION 2 (30 MARKS)

On 1 June 20X0, Premier acquired 80% of the equity share capital of Sanford. The consideration
consisted of two elements: a share exchange of three shares in Premier for every five acquired
shares in Sanford and the issue of a $100 6% loan note for every 500 shares acquired in Sanford.
The share issue has not yet been recorded by Premier, but the issue of the loan notes has been
recorded. At the date of acquisition shares in Premier had a market value of $5 each and the
shares of Sanford had a stock market price of $3.50 each. Below are the summarized draft
financial statements of both companies.
Statements of profit or loss for the year ended 30 September 20X0
Premier Sanford
$000 $000
Revenue 92,500 45,000
Cost of sales (70,500) (36,000)
Gross profit 22,000 9,000
Distribution costs (2,500) (1,200)
Administrative expenses (5,500) (2,400)
Finance costs (100) Nil
Profit before tax 13,900 5,400
Income tax expense (3,900) (1,500)
Profit for the year 10,000 3,900
Other comprehensive income:
Gain on revaluation of land (note (i)) 500 Nil
Total comprehensive income 10,500 3,900

Statements of financial position as at 30 September 20X0

Assets
Non-current assets
Property, plant and equipment 25,500 13,900
Investments 1,800 Nil

Current assets 12,500 2,400

Total assets 39,800 16,300

Equity and liabilities

Equity
Equity shares of $1 each 12,000 5,000
Land revaluation reserve – 30 September 20X0 (note (i)) 2,000 Nil
Other equity reserve – 30 September 20X9 (note (iv)) 500 Nil
Retained earnings 12,300 4,500
Non-current liabilities

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BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

6% loan notes 3,000 Nil

Current liabilities 10,000 6,800
Total equity and liabilities 39,800 16,300

The following information is relevant:

(i) At the date of acquisition, the fair values of Sanford’s assets were equal to their
carrying amounts with the exception of its property. This had a fair value of $1.2
million below its carrying amount, and had a remaining useful life of 8 years at the
date of acquisition. Sanford has not incorporated this in its financial statements.
Premier’s group policy is to revalue all properties to current value at each year end.
On 30 September 2010, the value of Sanford’s property was unchanged from its value
at acquisition, but the land element of Premier’s property had increased in value by
$500,000 as shown in other comprehensive income.
(ii) Premier had a trade payable balance owing to Sanford of $350,000 as at 30 September
2010. This did not agree with the corresponding receivable in Sanford’s books due to
a $130,000 payment made to Sanford, which Sanford has not yet recorded.
(iii) Premier’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Sanford’s share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
(iv) There has been no impairment of consolidated goodwill.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income for
Premier for the year ended 30 September 20X0. (11)
(b) Prepare the consolidated statement of financial position for Premier as at 30 September 20X0.
(19)
(Total: 30 marks)

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BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

(a) Consolidated statement of profit or loss and other comprehensive

income for the year ended 30 September 20X0
Revenue (92,500 + (45,000 × 4/12)) 107,500
Cost of sales (W4) (82,450)
Gross profit 24,650
Distribution costs (2,500 + (1,200 × 4/12)) (2,900)
Administrative expenses (5,500 + (2,400 × 4/12)) (6,300)
Finance costs (100)
Profit before tax 15,350
Income tax expense (3,900 + (1,500 × 4/12)) (4,400)
Profit for the year 10,950

Other comprehensive income:

Gain on revaluation of property 500
Total other comprehensive income for the year 800
Total comprehensive income 11,750
Profit for year attributable to:
Equity holders of the parent 10,760
Non-controlling interest (W2) 190

(b) Consolidated statement of financial position as at 30 September 20X0.

$000
Non-current assets
Property, plant and equipment 38,250
(25,500 + 13,900 – 1,200 (FV adj) + 50 (FV adj))
Goodwill (W1) 9,300
Investments (1,800 – 800 (consideration) 1,000

Current assets (12,500 + 2,400 +130 – 130 (cash in transit)– 400 (W2)(a)) 14,150

63,000
Equity
Equity shares of $1 each ((12,000 + 2,400 (W3)) 14,400
Share premium (W3) 9,600
Land revaluation reserve 2,000
Other equity reserve 500
Retained earnings (W5) 13,060
Non-controlling interest (W4) 3,690
43,550
Non-current liabilities
6% loan notes 3,000
Current liabilities (10,000 + 6,800 – 350 intra group balance) 16,450

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63,000
Working 1 Goodwill
Goodwill
Parent holding (investment) at fair value:
Shares ((5,000 × 80%) × 3/5 × $5 12,000
Loan note issue ((5,000 × 80%) / 500 × 100) 800
12800
NCI value at acquisition ((5,000 × 20%) × $3.50) 3,500
Less:
Fair value of net assets at acquisition (W2) (7,000)
Goodwill on acquisition 9,300

Working 2: Non-controlling interest (SOFP)

NCI value at acquisition 3,500

NCI share of post acquisition reserves 190
(7,950 – 7,000 (W2)) × 20% 3,690

Working 3: Consolidated retained earnings

Premier 12,300
Post acquisition in Sanford post acquisition reserves
(7,950 – 7,000 (W2)) × 80% 760
13,060
Working 4: Cost of sales
Premier 70,500
Sanford (36,000 × 4/12) 12,000
Reduction of depreciation charge (50)
–––––––
82,450

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BCTA ADVANCED FINANCIAL REPORTING ADDITIONAL PRACTICE QUESTIONS

QUESTION 3
Below are extracts from the financial statements of Poochie Ltd:
Statement of profit or loss for the year ended 31 March 20X1
$
Revenue 30,650
Cost of sales (26,000)
Gross profit 4,650
Distribution costs (900)
Administrative expenses (500)
Profit from operations 3,250
Investment income 680
Finance costs (400)
Profit before tax 3,530
Income tax expense (300)
Profit for the period 3,230

Statements of financial position

31 March 31 March
20X1 20X0
$ $
Non-current assets
Property, plant and equipment 2,280 850
Investments 2,500 2,500
Current assets

Inventories 1,000 1,950

Trade and other receivables 1,900 1,200
Cash and cash equivalents 410 160
Total assets 8,090 6,660

Equity and liabilities

Capital and reserves
Share capital 1,000 900
Share premium 500 350
Retained earnings 3,410 1,300

Non-current liabilities
Long term borrowings (including leases) 2,300 1,040

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Current liabilities
Trade and other payables 250 1,890
Interest payable 230 100
Taxation 400 1,000
Total equity and liabilities 8,090 6,660

Additional information:

• Profit from operations is after charging depreciation on the property, plant and
equipment of $450.
• During the year ended 31 March 20X1, plant and machinery costing $80 and with
accumulated depreciation of $60, was sold for $20.
• During the year ended 31 March 20X1, the company acquired property, plant and
equipment costing $1,900, of which $900 was acquired by means of lease. Cash payments
of $1,000 were made to purchase property, plant and equipment.
• $90 was paid under the lease.
• The receivables at the end of 20X1 includes $100 of interest receivable. There was no
equivalent balance at the beginning of the year.
• Investment income of $680 is made up of $300 interest receivable and $380 dividends
received.
• Dividends paid during the year were $1,200.
Required:
Prepare a statement of cash flows for Poochie Ltd for the year ended 31 March 20X1 in
compliance with IAS 7 Statement of Cash Flows using the indirect method.

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SOLUTION
Poochie Ltd: Statement of cash flows for the year ended 31 March 20X1
$ $
Cash flows from operating activities
Cash generated from operations 2,410
Interest paid (W1) (270)
Income tax paid (W2) (900)
Net cash from operating activities 1,240
Cash flows from investing activities
Purchase of property, plant and equipment (W3) (1,000)
Proceeds from sale of property, plant and equipment 20
Interest received (W4) 200
Dividends received 380
Net cash from investing activities (400)
Cash flow from financing activities
Proceeds from issue of shares (W5) 250
Proceeds from long-term borrowing (W6) 450
Payment of lease (90)
Dividends paid (1,200)
Net cash from financing activities (590)
Net increase in cash and cash equivalents 250
Cash and cash equivalents at beginning of period 160
Cash and cash equivalents at end of period 410

WORKINGS
(W1) Interest paid:
Interest liability b/f 100
Finance cost per SPL 400
Interest paid (Balancing figure) (270)
–––––
Interest liability c/f 230
(W2) Tax paid:
Liability b/f 1,000
Tax charge per SPL 300
Tax paid (Balancing figure) (900)
–––––
Liability c/f 400
(W3) Property, plant and equipment:
Balance b/f 850
Depreciation (450)
Disposal (80 – 60) (20)
Lease additions 900

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Additions (Balancing figure) 1,000

–––––
Balance c/f 2,280
(W4) Interest receivable
Balance b/f -
SPorL income 300
Interest received (Balancing figure) (200)
–––––
Balance c/f 100
(W5) Share capital/share premium
Balance b/f (900 + 350) 1,250
Share issue (Balancing figure) 250
–––––
Balance c/f (1,000 + 500) 1,500
(W6) Long-term borrowings
Liability b/f 1,040
Lease additions 900
Repayment of lease (90)
Loan received (Balancing figure) 450
–––––
Liability c/f 2,300

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