CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF ENTREPRENEURSHIP AND BUSINESS

SCIENCES

DEPARTMENT OF ACCOUNTING SCIENCES AND FINANCE

BSc (HONS) IN ACCOUNTANCY

COURSE: FINANCIAL REPORTING

CODE: CUAC208 (MAIN)

DATE: AUGUST – DECEMBER

2020

DURATION: 3 HOURS, 30 MINUTES

INSTRUCTONS TO CANDIDATE:
1. Answer all FOUR questions.
2. Your answers must comply with IFRSs and relevant statutes
in all aspects where necessary.
3. All relevant workings and formulae must be shown.
4. Start each question on a separate page.
5. Non-programmable calculators may be used.
6. Use good business language and clear presentation in your
answers.

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QUESTION 1
The following trial balance was extracted from the books of Korona Ltd on 31 December 2019.
Not Dr Cr
e
$000 $000
Revenue 460 000
Cost of sales 195 000
Distribution costs 65 000
Administration expenses 42 000
Investment property 1 300 000
Equity investment at cost 2 42 000
Interim dividends 66 000
Land and buildings at cost 3 400 000
Plant and equipment at cost 3 650 000
Accumulated depreciation (1 January 2019): 3 120 000
Land and buildings
Accumulated depreciation (1 January 2019): 3 310 000
Plant and equipment
Development expenditure 4 80 000
Suspense account 5 13 000
Trade receivables 70 000
Inventory at 31 December 2019 66 000
Cash and bank 99 000
Trade payables 46 000
Share premium account 150 000
Ordinary shares of $0.10 each 7 500 000
8% Debenture (issued on 1 February 2019) 8 120 000
Retained earnings at 1 January 2019 382 000
2 088 2 088
000 000

The following notes are also relevant:

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1. Investment properties are accounted for under the fair value model
of International Accounting Standard (IAS) 40. The figure included in the
trial balance represents the fair value of these properties at 1 January
2019. The fair value of these properties at 31 December 2019 was $265
000 000.
2. The figure for investments represents the cost of equities purchased
during the year. As permitted by International Financial Reporting
Standard (IFRS) 9, an election was made at the date of purchase to
account for any fair value gains and losses on these equity instruments
through “other comprehensive income”. The fair value at 31 December
2019 was $47 500 000.
3. Land and buildings are carried under the cost model as permitted by
IAS 16. The land cost included in the trial balance figure for land and
buildings is $100 000 000. The buildings were originally deemed to have
had a useful economic life of 30 years, of which 12 had passed by 1
January 2019. During the year, a decision was taken to change the
accounting policy to apply the revaluation model from 31 December 2019.
The revalued amounts at that date were certified by a qualified valuer to
be $65 000 000 for the land and $200 000 000 for the buildings.
Plant and equipment is being depreciated at 25% per annum reducing
balance.
All depreciation is charged to cost of sales.
4. The development expenditure relates to amounts incurred on various projects undertaken
by the company during the year. It is estimated that the composition of this is as follows:
$000
Research costs 15 000
Development costs (relating to projects meeting the IAS 38 37 500
criteria for capitalisation)
Development costs (relating to projects not meeting the IAS 27 500
38 criteria for capitalisation)

5. The suspense account relates to a contingent asset recognised

during the year ended 31 December 2019, as it was considered virtually
certain to be recovered. However, developments during 2019 led to the
conclusion that the likelihood of recovering this amount had fallen
somewhat. It is now considered 65% is likely to be recovered. The
bookkeeper was unsure what to do about this item.
6. Corporation tax for the year was estimated at $1 300 000.

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7. The directors proposed a final ordinary dividend of 1.20 cents per
share. The proposal was approved prior to the reporting date. No account
has been taken of this proposal.
8. The debentures were issued during the year. Interest is payable
annually in arrears. No interest has been provided for or paid as at 31
December 2019.

Required:
a) As far as the given information permits, prepare the financial
statements of Korona Ltd. Notes to the financial statements are required.
(16 Marks)
b) Discuss the view that historical financial statements are outdated by
the time they are produced and therefore should not be used for decision
making purposes. (9
Marks)
[TOTAL: 25 MARKS]

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QUESTION 2

The following information was obtained from the statement of profit or loss and other
comprehensive income and statement of changes in equity of Rondorozi Ltd for the year ended 31
December:
Not 2019 2018
e
$000 $000
Revenue 1 2 510 1 030
Cost of sales (1 (1
250) 035)
Other expenses 2 (910) (770)
Other income (investment income) 3 85 120
Finance costs (30) (25)
Profit before tax 405 320
Income tax expense (75) (60)
Profit for the year 330 260
Other comprehensive income - -
Total comprehensive income for the year 330 260
Ordinary dividends paid (statements of changes 4 70 90
inequity)
Retained earnings beginning of year 335 185

Additional information
1. Revenue consisted of the following:
2019 2018

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 $000 $000
Selling of goods 1 400 1 285
Services rendered 870 745
Profit on expropriation of land 110 -
Other sundry income 130 -
2 510 2 030

2. The following items are included in other expenses:

2019 2018
$000 $000
Depreciation of equipment 15 25
Staff cost 150 120
Distribution costs 170 135
Administrative expenses 185 170

3. A dividend received of $80 000 for the 2019 financial year has yet to
be recorded.
4. Ordinary dividends of $55 000 declared have yet to be accounted
for in the 2016 financial year.
5. The management of the company told you that the accounting estimate in respect of the
depreciation of equipment has changed and was accounted for, since the previous pattern of
depreciation differs from the actual pattern of economic benefits from depreciable assets. The
reducing balance method is applied from 2016 at 20% per annum, instead of the straight line
method over five years. According to the reducing balance method, the depreciation for the 2016
financial year was calculated as follows:
$000
Carrying amount of asset beginning of year 75
Depreciation for the year (15)
Carrying amount end of year 60
The original cost of the equipment was $125 000.
6. During the 2018 financial year, the following error occurred: An
investment in shares purchased at a fair value of $75 000 was incorrectly
recognised as administrative expenses. The fair value of the investment
remained unchanged until the end of 2018 financial year and it was
classified as at fair value through profit or loss. This error has not yet been
corrected. It is possible to open the accounting system of the 2018
financial year for purposes of correcting this error.
7. Ignore the tax effects of any adjustments.
Required:

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a) Fully account for the accounting policies, changes in accounting
estimates and errors for Rondorozi Ltd. Include relevant notes,
explanations and extracts in your answer.
(18 Marks)
b) Describe the changes that may be required to be done to the books
of accounts and financial statements for an entity operating in a
hyperinflationary environment.
(7 Marks)
[TOTAL: 25 MARKS]

QUESTION 3

a) Gurundoro Ltd is preparing its financial statements for the year

ended 30 September 2019. The following matters are all outstanding at
the year end.
CASE 1. Gurundoro Ltd is facing litigation for damages from a
customer for the supply of faulty goods on 1 September 2019. The
claim, which is for $500 000, was received on 15 October 2019.
Gerigina Ltd’s legal advisors consider that Gerigina Ltd is liable and
that it is likely that this claim will succeed. On 25 October 2019,
Gurundoro Ltd sent a counter-claim to its suppliers for $400 000.
Gurundoro Ltd’s legal advisors are unsure whether or not this claim will
succeed.
CASE 2. Gurundoro Ltd’s sales director, who was dismissed on 15
September, has lodged a claim for $100 000 for unfair dismissal.
Gurundoro Ltd’s legal advisors believe that there is no case to answer
and therefore think it is unlikely that this claim will succeed.
CASE 3. Although Gurundoro Ltd has no legal obligation to do so, it has
habitually operated a policy of allowing customers to return goods
within 28 days, even where these goods are not faulty. Gurundoro Ltd
estimates that such returns usually amount to 1% of sales. Sales in
September 2019 were $400 000. By the end of October 2019, prior to

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 the drafting of the financial statements, goods sold in September for $3
500 had been returned.
CASE 4. On 15 September 2019 Gurundoro Ltd announced in the press
that it is going to close one of its divisions in January 2020. A detailed
closure plan is in place and the costs of closure are reliably estimated
at $300 000, including $50 000 for staff relocation.
CASE 5. Gurundoro Ltd is jointly and severally liable with Kudenga Ltd
and Tunga Ltd for a legally binding obligation of repairing damaged
electrical gadgets worth $120 000. The extent of the liability amongst
Gurundoro, Kudenga and Tunga is 40%, 35% and 25% respectively.
Required:
Show, with reasons, how the transactions should be treated in
Gurundoro Ltd’s financial statements for the year ended 30 September
2016. (16 Marks)

[TOTAL: 25
MARKS]

b) Bhundumaster Ltd purchased an energy saving plant for $100 000

on 1 January 2019, having a useful life of 5 years with a residual
value of $10 000. The entity received a government grant equal to
20% of the cost of the
asset, on the condition that the plant must be used at least for a
period of 4 years, otherwise a repayment will arise on a sliding scale
basis, that is, 75% of the grant will be payable if the asset is sold in
the first year and it will diminish by 25% for subsequent years upto
the fourth year. Bhundumaster Ltd has no intention to sell the plant
in the first year.
Required:
Show how the plant and the related government grant will be accounted
for in the financial statements of Bhundumaster Ltd for the year ended 31
December 2019 using the gross up method and the net method,
separately.
(9 Marks)

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 [TOTAL: 25
MARKS]

QUESTION 4
Several accounting standards require or permit the use of fair values in
measuring assets and liabilities. However, there has not always been
consistency between these standards regarding the method of arriving at
fair value. International Financial Reporting Standard (IFRS) 13 was issued
as an attempt to remedy this problem. The IFRS aims to define fair value,
sets out a framework for measuring fair values and standardises
disclosures about the use of fair values by entities in their financial
statements. It does not attempt to give guidance regarding the use of the

9
resulting fair value figures, leaving this to the relevant standard dealing
with the asset or liability in question. IFRS 13 makes it clear that fair value
is market-based as opposed to being entity-specific. Hence the intentions
of an entity regarding an asset or liability are not relevant when
determining fair values.
Gawanzara Ltd is an entity with a 31 December reporting date.
Gawanzara Ltd has several assets that are measured at fair value and the
following details in respect of the year ended 31 December 2019 are
available:
1. Investment properties
Gawanzara Ltd has an office building that is rented out to third parties.
The fair value of the building was $5 600 000 as at 31 December 2018. Its
current use, the present value of the net cash flows of future earnings was
calculated at $5 700 000 on 31 December 2019. On 31 December 2019,
this building could be sold in the open market for $6 100 000 before
transaction costs of 2%. This open market value was determined with
reference to similar buildings situated in the same location that are
currently in the market.
2. Listed share investments
On 31 December 2019, Gawanzara Ltd’s listed investments, consisting
equity investments, had a total net market value of $2 623 500 after
brokerage fees of 1% were deducted. These investments are traded in the
active market. The fair value of these investments was $2 510 000 as at
31 December 2018. These investments were classified as measured at fair
value through profit or loss.

3. Assets held for sale

On 31 December 2019, Gawanzara Ltd had a machine with a carrying
amount of $350 000, that was held for sale. The machine was written
down to fair value of $260 000, less costs to sell of 10%, resulting in a

10
loss, which was included in profit or loss for the year. The value in use was
lower and was calculated at $212 000.
Required:
a) Discuss the meaning of ‘fair value’. (8
Marks)
b) Outline the three level hierarchy proposed by IFRS 13 to evaluate
informational inputs into the measurement of fair value. (8
Marks)
c) Show how you would measure the fair values of Gawanzara Ltd’s
investment properties, listed share investments and assets held for sale
for inclusion in financial statements. Indicate in each case the level of the
inputs used. (9 Marks)
[TOTAL: 25
MARKS]

END OF EXAMINATION

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