QUESTION 2 [25 MARKS]

a) On 1 October 2017 an entity acquired a machine under the following terms.

Hours $
Manufacturer's base price 1 050 000
Trade discount (applying to base price only) 20%
Early settlement discount taken (on the payable amount of the base cost only) 5%
Freight charges 30 000
Electrical installation cost 28 000
Staff training in use of machine 40 000
Pre-production testing 22 000
Purchase of a three-year maintenance contract 60 000
Estimated residual value 20 000
Estimated life in machine hours 6 000
Hours used – year ended 30 September 2018 1 200
– year ended 30 September 2019 1 800
– year ended 30 September 2020 (see below) 850

On 1 October 2019 the entity decided to upgrade the machine by adding new components at a
cost of $200 000. This upgrade led to a reduction in the production time per unit of the goods
being manufactured using the machine. The upgrade also increased the estimated remaining life
of the machine at 1 October 2019 to 4 500 machine hours and its estimated residual value was
revised to $40 000.

Required
Prepare extracts from the Statement of Financial Performance and Statement of Financial Position
for the above machine for each of the three years to 30 September 2020 in accordance to the
requirements of IPSAS 17: Plant, property and equipment. (10 marks)
b) The governing body of the Midlands Municipality are disappointed by the financial
performance of the entity as shown in the draft Financial Statements for the year ended 30
September 2020. The Municipality's assistant accountant has suggested an area where she
believes the reported surplus may be improved:

A major item of plant that cost $20 million to purchase and install on 1 October 2017 is being
depreciated on a straight-line basis over a five-year period (assuming no residual value). The plant
is wearing well and at the beginning of the current reporting year (1 October 2019) the production
manager believed that the plant was likely to last eight years in total (i.e from the date of its
purchase). The assistant accountant has calculated that, based on an eight-year life (and no
residual value) the accumulated depreciation of the plant at 30 September 2020 would be $7.5
million [($20 million / 8years) × 3years].

In the financial statements for the year ended 30 September 2019, the accumulated depreciation
was $8 million ($20 million / 5 years × 2). Therefore, by adopting an eight-year life, the
Municipality’s can reduce the accumulated depreciation charge and instead actually credit back
$0.5 million ($8 million – $7.5 million) to the Statement of Financial Performance in the current
year to improve the reported surplus.
Required
Comment on the acceptability of the assistant accountant's suggestions, consider the implications
of IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors (5 marks)

c) Midlands National University prides itself in being the best University in the country. The
university spends substantial amounts of money in employee training, education and
continuous professional development for both academic and support staff.

Required:
Discuss how the recognition criteria for assets prevent employees from being recorded as an asset
in the Statement of Financial Position according to the specifications of IPSAS 31: Intangible
assets. (5 marks)
d) A public sector entity informs its Board that the surplus of the entity for the year ended 31
December 2020 was much lower than expected because repairs and maintenance expenses
were heavy.

An analysis of the repairs and maintenance account shows that the repairs and maintenance
expenses included the following costs;

- Upgrade of machinery, increasing its production capacity by 10% amounting to $175 000.
- $62 500 for the replacement of major worn out components in an old piece of machinery.
You also receive additional information that the carrying value of these old parts was $7
000. They were sold as scrap and the proceeds of $4 000 were credited to the sales
revenue account
- Servicing costs made up of sundry materials of $8000 and wages of $1000.

Required:
Advice the accountant as to whether these expenses have been accounted for correctly and
appropriately. (5 marks)
QUESTION 2 SOLUTION

a) Year ended 30 Sept 2018 30 Sept 2019 30 Sept 2020

SOFP: $ $ $
Revenue:
Discount received (840 000 *5%) (42 000) – –
Expenses:
Depreciation (W3) 180 000 270 000 119 000
Maintenance (60 000/3) 20 000 20 000 20 000
Staff training 40 000 – –
198 000 290 000 139 000

As at: 30 Sept 2018 30 Sept 2019 30 Sept 2020

Statement of financial position $ $ $
Property, plant and equipment 740 000 470 000 551 000

Workings
1 Cost price
$
Base price 1 050 000
Trade discount (1 050 000 * 20%) (210 000)
Purchase price 840 000
Freight charges 30 000
Electrical installation cost 28 000
Pre-production testing 22 000
920 000

2 Valuation after upgrade

 $
Original cost 920 000
Depreciation to 30 September 2019 (W3) (450 000)
Carrying amount 470 000
Upgrade 200 000
Valuation 670 000

3 Depreciation

$ $

• 30 September 2018:

(920 000 – 20 000) * 1 200 / 6 000 180 000

• 30 September 2019:

(920 000 – 20 000) * 1 800 / 6 000 270 000

450 000

• 30 September 2020:

(670 000 – 40 000) * 850 / 4 500 119 000

4. Determination of carrying amount

As at: 30 Sept 2018 30 Sept 2019 30 Sept 2020
Statement of financial position $ $ $
Property, plant and equipment:
Cost/valuation (W1) (W2) 920 000 920 000 670 000
Accumulated depreciation 180 000) (450 000) (119 000)
Carrying amount 740 000 470 000 551000

b) As the plant is wearing well and the production manager now estimates its total life to be eight
 years, it is reasonable to adjust its remaining life. However, the adjustment proposed by the
assistant accountant is incorrect and unacceptable . This is a change in accounting estimate
and is not applied retrospectively . At 1 October 2019 the remaining life of the plant will be
six years (8 years less 2 years that have gone by)– the new estimated life of eight year less the
two years which have elapsed.
The correct adjustment will be calculated as follows.
$m
Original cost 1 October 2017 20
Two years depreciation ((20/5) × 2) (8)
Carrying amount at 1 October 2019 12
Depreciation to 30 September 2020 (12/6) (2)
Carrying amount at 30 September 2020 10

There will be no credit to profit or loss for the year and depreciation will continue to be charged,
but at a reduced rate.
c) The recognition criteria for assets prevent employees from being recorded as an asset in the
Statement of Financial Position according to the specifications of IPSAS 31: Intangible
assets because, an intangible asset is;
• An economic resource controlled by an entity
• As a result of a past event
• From which economic benefits and service potential are expected to flow

With employee training;

• There is no control over employees, employees can leave the organization any time
• There is no reliable estimate of the economic benefits expected

d) The cost of upgrading machines is capital expenditure as it improves their earning capacity. It
should be debited to the machinery account. Assuming that there is no replacement of any parts,
no derecognition is required. Depreciation will be charged on $175,000. The entry for
correction is:
Dr Machinery account $175 000
 Cr Repairs and maintenance $175 000

Being cost for upgrading the machines

➢ The cost of the new part for $62 500 will be capitalised, and depreciation charged thereon.
The entry for correction is:

Dr Machinery account $62 500

Cr Repairs and maintenance $62 500

Being the cost of new plant wrongly debited to repairs and maintenance now transferred to
machinery account

The old part should be derecognised from machinery and transferred to a disposal account, as:

Dr Disposal of machinery account $7,000

Cr Machinery account $7,000

Being machinery disposed and machinery account nullified

Sale proceeds have been wrongly credited to sales. The following rectification entry is needed:

Dr Sales account $4,000 (since wrongly credited)

Dr SOCI Loss on disposal of machinery parts $3,000

Cr Disposal of machinery account $7000

Being wrongly credited sales now corrected

➢ Servicing costs are correctly debited to repairs and maintenance account. No correction is
required.
QUESTION 3
QUESTION 3 [25 MARKS]

Midlands Provincial Governments’ Accountant destroyed accounting records after suspicions of

him embezzling funds surfaced. You have been engaged by the entity to try and piece together
financial information from what was recovered so that the information could be used to determine
the extent of the fraud if any. Some of the Financial Statements for Midlands Provincial
Government for the year ended 30 April 2020 are available;

- a complete Statement of Financial Position,;

- a Cashflow Statement; and

- pieces of information extracted from the Statement of Financial Performance and Statement
of Changes in Net Assets.

However, you do not have the Statement of Financial Position for the previous year, 2019. Below is
the information presented to you;

(a) Statement of Financial Position as at 30 April 2020

$000 $000 $000

NET ASSETS

ASSETS:

Current assets:

Inventory 212

Receivables 96

308

Non-Current Assets:

Intangible: Goodwill – – –

Tangible: PPE (see note below) 890

Total Assets 1 198

LIABILITIES

Current- Liabilities:

10% Bond (2028) 80

Non-Current Liabilities

Bank 36

Trade creditors 63

Ordinary dividend 20 119 (199)

Net assets 999

NET ASSETS (EQUTY):

Share capital and reserves:

Ordinary shares of $1 405

Revaluation reserve 360

General reserve 100

Accumulated Surplus 134

Net assets 999

(b) Plant, property and Equipment (PPE) Note

Cost Depn. Carrying Amount

Or Valuation

Freehold premises 600 – 600

Plant and machinery 520 280 240

Motor vehicles 135 85 50

1 255 365 890

(c) Extract information from the Statement of Financial Performance for the year ended 30
April 2020

$000 $000

Operating Surplus 119

Interest on Bonds 10

Surplus 109

(d) The following appropriations are made for the year ended 30 April 2020 from
Accumulated Surplus

$000

Transfer to General Reserve 20

Ordinary dividends - paid 10

- proposed 20

Total appropriations 50

(e) Cash Flow Statement for the year ended 30 April 2020

$000 $000

OPERATING ACTIVITIES

Cash inflow from operating activities (see (f) below) 226

Debenture interest paid (10)

Preference share dividend paid (3)

Equity dividends paid (25)

Net cashflows from Operating Activities 188

INVESTING ACTIVITIES

Payments to acquire tangible non current assets;

Plant and machinery (250)

Motor vehicles (62)

Receipts from sale of tangible non current assets (see below) 41

Net cashflows from investing activities (271)

FINANCING ACTIVITIES

Capital contributed by government 100

Redemption of preference shares (115)

Redemption of Bonds (40)

Net cash flow from financing activities (55)

Decrease in cash (138)

(f) Reconciliation of operating profit with net cash inflow from operating activities

$000

Operating profit 119

Goodwill written off 30

Depreciation: plant and machinery 150

motor vehicles 50

Loss on sale of motor vehicle (see (i) below) 4

Profit on sale of plant and machinery (see (ii) below) (15)

Increase in inventory (40)

Increase in receivables (28)

Decrease in payables (44)

Net cash inflow from operations 226

Further information relevant to the year ended 30 April 2020:

(i) Motor vehicles which had cost $35 000 were sold for $6000.

(ii) Plant and machinery which had cost $90 000 was sold for $35 000.

(iii)The freehold premises were purchased on 1 May 2010 for $400 000. They had been depreciated
annually at the rate of 4% on cost.

(iv) $40 000 bonds had been redeemed at par on 31 October 2019.

(v) Midlands Provincial Government had a couple of years back under a Residents Empowerment
Scheme under a Public Private Partnerships, issued 6% $1 Redeemable Preference Share
Capital at par. The funds were required for the refurbishment of the properties. The Preference
Shares were then redeemed at a premium of $0.15 on 1 May 2019. The redemption was
financed by additional capital contribution from the National Government of $100 000.

Required

Prepare Midlands Provincial Governments’ Statement of Financial Position as at 30 April 2019.

QUESTION 3 SOLUTION
Midlands Provincial Government
Statement of Financial Position as at 30 April 2019
$000 $000 $000 Notes
Current assets
Inventory (212 – 40 ) 172
Receivables (96 – 28 ) 68
Bank (138 – 36 ) 102
342
Non-Current Assets
Intangible:
Goodwill (+ 30 w/o) 30
Tangible Assets
Plant, property and equipment 448
478

Total Assets 820

LIABILITIES
Current liabilities
Trade payables (63 + 44 ) 107
Preference dividend 3
Ordinary dividend (25 – 10 ) 15
125
Non-current liabilities
10% debentures (80 + 40 ) 120
(245)
Net assets 575

Net Assets
Ordinary shares of $1 (405 –100) 305
6% Preference shares of $1 100
(Revaluation reserve) (360 (X) – 200 – 160 ) -
General reserve (100 (X) – 20 ) 80
Accumulated surplus (134 – 59 +15 ) 90
575

Notes
$000
1. Freehold premises at cost (given) 400
Depreciation 2011 - 2020 (10 yrs)
Annual depreciation 400 x .04 16
Depreciation at 30/4/2010 = 10 x 16 160

2. Plant and machinery at cost (520 + 90– 250 ) 360

Depreciation (280 -150 + 70*) 200
[* Cost 90 + profit 15 – proceeds 35 = 70]

3. Motor vehicles at cost (135 (X) + 35 – 62 ) 108

Depreciation (85 – 50 + 25* ) 60
[* Cost 35 – loss 4 – proceeds 6 = 25]

Tangible: (accept 144 ) OR

Freehold premises 400 160 240

Plant and machinery 360 200 160
Motor vehicles 108 60 48
868 420 448
QUESTION 4

QUESTION 4 [25 MARKS]

The following trial balance was extracted from the accounting records of Learnmore School as at
31 December 2020:
$ $
Sale of school uniforms and books 345 000
Funding grants (note (vi)) 1 010 000
Other operating expenses 255 000
Loan interest paid 2 250
Rental income 89 000
Wages and salaries 847 040
Income from adult education courses (note (v)) 205 000
Capital contributed by government 275 000
Buildings – at valuation 450 000
Land - at valuation 200 000
Fixtures
fittings and equipment 567 000
Accumulated depreciation: buildings (at 1 Jan 2019) 30 000
: fixtures
fittings and equipment (at 1 Jan 2020) 250 000
Provision (note (iii)) 38 000
Bank 173 400
Current asset investments 30 000
Trade receivables and payables 38 460 75 150
Long term bank loan 112 000
Accumulated Surplus (at 1 Jan 2020) 39 000
Revaluation surplus 95 000
2 563 150 2 563 150
Additional information:
(i) The school follows the revaluation model under IPSAS 17: Plant, property and equipment. A
valuation of land and buildings during the year revealed that land was worth $230 000 and
buildings $475000.
(ii) No depreciation charge has yet been provided and accounted for.
- The school’s policy is to depreciate buildings straight line over their useful economic life
of 60 years, of which 47 were remaining as at 1 January 2020.
- Equipment is depreciated using the reducing balance basis at 20% per year.
(iii)The provision relates to an on-going discrimination claim by a former teacher. Shortly before
the end of the current financial year, the ex-teacher agreed to settle his claim in exchange for
total compensation of $45 000 and a bank transfer for the full amount was made on 31
December 2020, thus marking the end of the case. No entries have yet been made in the
accounts.
(iv) During the year, a pupil was injured during a rugby match. The pupil’s parents have begun
legal proceedings, and the school’s legal advisors believe that the school will eventually have
to pay compensation of $500 000. Due to a backlog in the national courts system, the case is
unlikely to be resolved in court until the end of 2023. The country’s central treasury
department recommends that all provisions are discounted at 3% per year. No amounts have
yet been included in the trial balance.
(v) The school provides evening courses to adults in the local area, and these are fully funded by
fees charged to adults. Of the total income of $205 000 shown in the trial balance, $106 000
relates to the September – December 2020 term and the remainder relates to fees paid in
advance for the January – April 2021 term.
(vi) On 15 August 2020, the National Languages Agency made a bank transfer of $29 000 to the
school. This is included in the funding grants balance in the trial balance. The grant was made
to the school for improving learning outcomes for students whose first language is not
English, and has been given on the condition that it is used to employ a specially trained
language teacher. A suitably qualified teacher was employed for this project from 1
September 2020, and the total salary cost for the teacher up to 31 December 2020 was $8 000.

Under the terms of the grant, the money can only be used as stipulated, and the school is required
to include a note in its audited general purpose financial statements detailing how the grant money
was spent. The agreement requires the grant to be spent as specified by 31 August 2021 or be
returned to the agency.
(vii) On 1 July 2020, the school entered into a 24 months operating lease on a photocopying
machine. The machine was received on the same day and immediately went into use. The
leasing company has given the school free rental for the first 6 months of the lease, with
payments of $2 000 per month to commence on 1 January 2021 for each of remaining 18
months of the lease. As no payments were made during the year, the school’s accountant has
made no entry into the accounts for the lease.
Required
From the information above, prepare the;
a) Statements of Financial Performance for the Improvements Agency for the year ended 31
December 2020. (12 marks)
b) Statement of Financial Position for the Improvements Agency as at 31 December 2020.
(13 marks)

QUESTION 4 SOLUTION

a) Learnmore School

Statement of financial performance for the year-ended 31 December 2020

$ $

Operating revenue:

Funding grants 1 010 000-21 000 989 000

Rental income 89 000

Tuition fees 205 000 – 99 000 106 000

Other revenue 345 000

Total operating revenue 1 529 000

Operating expenses:
Wages salaries and employee benefits (847 040)

Depreciation 10 106+63 400(W2) (73 506)

Legal claims 7 000 + 460 000 (W3) (467 000)

Other operating expenses 255 000+9 000 (W4) (264 000)

Total operating expenses (1 651 546)

Deficit from operating activities (122 546)

Finance costs (2 250)

Surplus (deficit) for the year (124 796)

b) Learnmore School

Statement of financial position as at 31 December 2020

Workings $’000 $’000

$’000

ASSETS

Current assets

Receivables 38 460

Short term investments 30 000

Cash 173 400 - 45 000 128 400

196 860

Non-current assets

Land W1 230 000

Buildings W1 464 894

Equipment W1 253 600

948 494

Total assets 1 145 354

LIABILITIES

Current liabilities

Payables 75 150

Accrued expenses W4 9 000

Provision for legal claim W3 460 000

Income in advance 99 000 + 21 000 120 000

664 150

Non-current liabilities

Bank loan 112 000

Total liabilities 776 150

Net assets 369 204

NET ASSETS/EQUITY

Capital contributed by government 275 000

Revaluation reserve 95 000 + 30 000+ 55 000 (W1) 180 000

Accumulated deficit 39 000 – 124 796 (85 796)

Total net assets/equity 369,204

Working 1: Property, plant and equipment

 Land Buildings Furniture, fittings
and equipment

$ $ $

Cost or valuation b/f 200,000 450,000 567,000

Revaluation (balancing figure) 30,000 25,000 -

c/f 230,000 475,000 567,000

Accumulated depreciation

c/f 30,000 250,000

Revaluation (30,000)

Charge for the year (W2) 10,106 63,400

c/f - 10,106 313,400

Carrying value at year-end 230,000 464,894 253,600

Revaluation of building:
Before After Movement
$ $ $
Gross cost 450,000 475,000 25,000
Accumulated depreciation (30,000) - 30,000
Net carrying value 420,000 475,000 55,000
– to revaluation reserve

Working 2: Depreciation
$
Buildings: $475,000/47 = 10,106
Equipment: ( $567,000- $250,000) x 20% 63,400
73,506
Working 3: Provisions
Note 3: Provision no longer required. Excess amount paid ( $45K - $38K = $7K) to operating
expenses for the year.
Note 4: Meets IPSAS 19 criteria for provision. Needs to be discounted at 3% for 3 years:
Discount factor = (1/1+.03)3 = 92%
Therefore provision required 92% x $500,000 = $460,000

Working 4: Operating lease

Spread total cost of lease straight line and recognise 6 out of 24 months for 2020
Total cost of lease (18 months x $2,000 ) = $36,000
$36,000 x 6 months / 24 months benefit to allocate to 20X6 = $9,000 (Accruals)