Zimba Uganda Ltd (ZUL) deals in various construction projects

Subject:FinancePrice: Bought3

Share With

Zimba Uganda Ltd (ZUL) deals in various construction projects. As an accountant for ZUL, you are expected to give relevant advice required on each of the transaction below that took place during the year ended 30 June, 2018.

1. (a) ZUL entered into contracts with government to construct houses for low income earnerson their land. The contract has standard terms, which include penalties payable by ZUL if the contract is delayed, or payable by the government if ZUL cannot gain access to the construction site.
2. Due to poor weather, one of the projects was delayed. As a result ZUL faced additional costs and contractual penalties. As ZUL could not gain access to the construction site, the directors decided to make counter claims against thegovernment for penalties and additional costs which ZUL faced.The management of ZUL felt that because claims had been made against the government, the additional costs and penalties should not be included in the contract costs but shown as contingent liability.Management has assessed the legal basis of the claims and feels it has enforceable rights.
3. ZUL incurred general andadministrative costs Shs 150million, and costsrelating to wasted material Shs 70millionin the year ended 30 June, 2018. All these costs were capitalised as assets in the financial statements.
4. The directors of ZUL wish to know how to account for the penalties, counter claim, and additional costs in accordance with IFRS 15:Revenue from Contracts withCustomers.
5. Required:
6. Advise the management ofZUL how the above transaction should be dealt with in the financial statements, with reference to the relevant financial reporting standards.
7. (10 marks)
8. (b) Due to the specialised nature of the contracts ZUL deals with, management decided to acquire ahydraulic excavator to help in the constructionprojects.
9. In order to manage the cash flows,management agreedto acquire the excavator through a lease agreement on 1 July, 2016.The fair value of the excavatorat the time the lease was entered into was Shs 550million with an estimated useful life of 7 years. ZUL was required to remit annual lease

 

payments of Shs 145,330,300 at every year end for 6 years starting 30 June, 2017 and was to incur costs relating to repairs and maintenance of the equipment if they arose.

No record relating to the lease has been made in the financial statements of ZUL despite the company depreciating its non-current assets on a straight-line basis at a rate of 10% per annum. The directors of ZUL are of the view that the lease payments should be expensed in the financial statements. Consequently they have approached you as the accountant for advice.

Required:

In accordance with the requirements of IAS 17: Leases, advise the directors of ZUL on how the above lease transaction should be treated in the financial statements of ZUL, giving the conditions that must be met for a lease to be classified as a finance lease.

The interest rate implicit in the leases is 10%.

(15 marks)

(c) ZUL has a sand mining licence to mine sand from specific areas on the shores of Lake Victoria. As part of the terms of its mining licence, ZUL is required to restore the mining site and clean up any contamination after mining the sand. During the year ended 30 June, 2018ZUL had four mining sites, the present value of the expected cost of restoring the mining sites and cleaning up the environmentwas estimated to be Shs85million.

On 12 May, 2018 ZUL decided to close down an operation division in Kisoro. Expected costs of closure were estimated at Shs 212million. The closure had not yet been communicated to the affected parties until 23 August, 2018.

Required:

Explain how the above transactions should betreated in the booksof ZUL in accordance with the requirements of IAS 37:Provisions, Contingent assets and Contingent liabilities.

(6 marks)

 

(d) ZUL acquired a loan of USD 70,000 on 1 July, 2017to facilitate the acquisition of track-type tractor that was required on a project in Kanungu district.By 30June, 2018ZUL had paid back USD 50,000 on various dates as follows:

Date

1 October, 2017 1 January, 2018 1 April, 2018

USD paid 20,000 20,000 10,000

Exchange rate 3,500 3,550 3,580

Then exchange rate of USD 1/Shs on the 1 July, 2017 and 30 June, 2018 was 3,470 and 3,600 respectively.

Required:

Advise the management of ZUL on how the above transactions relating to the loan should be treated in the financial statements for the year ended 30 June, 2018 giving extracts of financial statements.

Ignore interest charges; ZUL's reporting currency is Shs.

SECTION B

Attempt three of the four questions in this section

Question 2

Tukole Uganda Limited (TUL) deals in the distribution of general merchandise in Kampala. The company has been growing over the years and has expanded toneighbouring districts of Kampala.

Included in the inventory of TUL on 31 March, 2018 are goods that cost Shs 51.2 million. The prices of these goods on the open market fluctuate frequently.TUL established that the cost price of these goods on 31 March, 2018 was Shs 55.2million.

The new CEO of TUL is of the view that this type of inventory was undervalued and was not treated in accordance with international financial reporting standards (IFRS). You have been requested by the CEO to explain the different accounting measurement bases used in determining values of the different elements of financial statements.

 

Required:

(a) Discuss,giving examples, the significance of each the following accounting measurement bases used in preparing financial statements.

1. (i) Historical cost.
2. (ii) Current cost.
3. (iii) Realisable (settlement) value.
4. (iv) Present value.

 

(b) Advise on the value at which TUL should record inventory in the financial statements for the year ended 31 March, 2018 given that TUL can sell the above inventory for Shs 62 million, and incur selling costs amounting to Shs 4 million.

 

Question 3

1. (a) The objective of IFRS 10; Consolidated Financial Statements is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.
2. Required:
3. In accordance withthe Standard, explain the term 'investment entity' and the conditions that need to be satisfied for an investor to have control over an investee. (5 marks)
4. (b) Tugende Transporters Limited (TTL) was incorporated in Uganda in 2012 and deals in the buying and selling of motorcyclesin eastern Uganda. On 1January, 2015TTL acquired 120,000 ordinary shares in Busabaala Drivers Association (BDA). At the date of acquisition BDA had 150,000 shares of Shs 1,000each in issueand retained earnings of Shs 30 million. The following are the statements of profit orloss and other comprehensive income for TTL and BDA for the year ended 30June, 2018.

TTL Shs '000'

Revenue 825,000

BDA Shs '000'

245,000 (130,000) 115,000 (58,500) 56,500 (5,500) 51,000 (15,300) 35,700

Cost of sales

Gross profit Operating expenses Profit from operations Finance cost

Profit before tax Tax (30%)

Profit for the year

(453,000) 372,000 (194,000) 178,000 (15,000) 163,000 (48,900) 114,100

 

 

You are provided with the following additional information:

1. During the year ended 30 June, 2018, TTL sold goods worth Shs 25 million to BDA at a markup of 25%. Only 50% of these goods were sold before the year end, the rest were still in inventory.
2. It has been company policy to review goodwill impairment at least annually since acquisition. The review at the end of this year, revealed an impairment of Shs 10 million. Impairment is to be recognised as an operating cost.
3. TTL paid a dividend of Shs 20 million on 29 June, 2018.
4. Required:
5. Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 30 June, 2018.
6. (15 marks) (Total 20 marks)

Question 4

Rwobuza Medical Clinic (RMC) located in Ibanda district has always specialised in the treatment of children (pediatrics).RMC recently established a maternity wing since this servicewas only offered at the main districthospital. RMC secured a number of grants from the Ugandan government and a Norwegain based non- governmental Organisation (NGO) to operationalise the maternity wing and reproductive health outreach program.Grant recording and reporting is new to the accounts staff of RMC. You have been contracted by the management of RMC as a consultant.

You have been provided with the following transactions that took place during the year ended 31 March, 2018:

1. RMC was awarded a grant of Shs 320 million by the government of Uganda to be disbursed over five years in equal installments in respect to providing maternity services.The first installment was disbursed during the year ended 31 March, 2018.
2. RMC was awarded a grant of Shs 20 million by the Norwegain NGO in respect to reproductive health outreach program in the areaand the amount was disbursed during the year ended 31 March, 2018.
3. Government awarded RMCa grant of Shs 480 million towards equipment in the maternity wing quoted at Shs 2,400 million.This grant was disbursed during the year ended 31 March, 2018. The equipment has a useful life of 10 years with no residual value.

 

1. RMC made an extension to its premises at cost of Shs 1,360 million.The extension was financed by a five year loan at 16% per annum. The extension was completed within 11 months during the year ended 31March, 2018.
2. RMC was awarded a grant for Shs 126 million by the Irish government on 1 December, 2016 to cover child health outreach propram for16 months period ending 31 March, 2018. However, this activity was cancelled tofavour the reproductive health programafter Shs 29 million had been spent on child health outreach.
3. Required:
4. Write memo to the management of RMC, explaining the treatment of the above transactions in the financial statements of RMC for the year ended 31 March, 2018 in accordance to relevant accounting standards.
5. (Total 20 marks)

Question 5

Rane Management Services Limited (RMSL) has been operating for several years offering real estate consultancy services. However, towards the close of 2017 disagreements ensued among the shareholders and the board of RMSL voted for voluntary liquidation on 31 May, 2018.The following extracts were derived from the financial statements of RMSL as at 31 May, 2018.

Assets:

Land & buildings

Plant & machinery

Patents

Inventory

Receivables

Cash & bank

Retained earnings

Liabilities:

17% equity bonds

Equity shares

15% debentures secured by a floating charge Interest outstanding on debentures

Payables

Shs '000' 7,500,000 18,750,000 3,000,000 4,125,000 8,250,000 2,250,000 8,437,500

15,000,000 19,125,000 7,500,000 1,125,000 9,562,500

Equity bonds interest was in arrears for 2 years.Payables included tax arrears amounting to Shs 1,140 million. The other information in the financial report indicates that there was an outstanding call on equity shares amounting to Shs 2,875,000.

 

The assets realised were as follows: Shs '000'

Land & building Plant & machinery Patents

Inventory Receivables

9,000,000 15,000,000 2,250,000 4,500,000 6,000,000

The expenses of liquidation amounted to Shs 817.5 million. The liquidator is entitled to commission of 5% on assets realised except cash.

Required:

Prepare the liquidator's statement of account as at 31 May, 2018 showing all necessary workings.