FINANCIAL REPORTING MOCK FOR JULY, 2024 EXAMINATIONS (PROFESSIONAL) LEVEL 2 Expert Verified

FINANCIAL REPORTING MOCK FOR JULY, 2024 EXAMINATIONS (PROFESSIONAL) LEVEL 2 Expert Verified OLIVER TWIST PROFESSIONAL INSTITUTE Answer ALL Questions THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) MOCK FOR JULY, 2024 EXAMINATIONS (PROFESSIONAL) LEVEL 2 FINANCIAL REPORTING (PAPER 2.1) QUESTIONS Time Allowed 3 Hours Plus 15 Minutes for Reading & Planning Reading Time During the reading time, you may write notes on the examination paper but you should not commence writing in your answer booklet provided. 22nd June, 2024 Lecturer/Examiner: (SIR EDEM) SIR EDEM () Page 2 of 11 QUESTION ONE Hard Ltd, a public listed company, acquired the following investments:  On 1 April 2023, 24 million shares in Soft Ltd. This was by way of an immediate share exchange of two shares in Hard Ltd for every three shares in Soft Ltd plus a cash payment of GH¢1 per Soft Ltd share payable on 1 April 2026. The market price of Hard Ltd’s shares on 1 April 2023 was GH¢2 each.  On 1 October 2023, 6 million shares in Act Ltd paying an immediate GH¢2.50 in cash for each share. Based on Hard Ltd’s cost of capital (taken as 10% per annum), GH¢1 receivable in three years’ time can be taken to have a present value of GH¢0.75. Hard Ltd has not yet recorded the acquisition of Soft Ltd but it has recorded the investment in Act Ltd. Below are the Statements of Financial positions for all the three entities as at 31 March 2024. Statement of Financial Position as at 31st March, 2024 Hard Ltd Soft Ltd Act Ltd. GH¢’000 GH¢’000 GH¢’000 Non-current assets: Property, plant and equipment 41,000 34,800 37,700 Investments 15,000 3,000 Nil 56,000 37,800 37,700 Current assets: Inventories 9,900 4,800 7,900 Trade and other receivables 13,600 8,600 14,400 Cash and Bank 1,200 3,800 nil 24,700 17,200 22,300 Total assets 80,700 55,000 60,000 Equity: Ordinary shares (GH¢1 each) 20,000 30,000 20,000 Share premium 8,000 2,000 nil Retained earnings 10,600 8,500 8,000 38,600 40,500 28,000 Non-current liabilities: 10% loan notes 16,000 4,200 12,000 Current liabilities: Trade and other payables 16,500 6,900 13,600 Bank overdraft nil nil 4,500 Taxation 9,600 3,400 1,900 Total liabilities 42,100 14,500 32,000 Total equity and liabilities 80,700 55,000 60,000SIR EDEM () Page 3 of 11 The following additional information may be relevant: i) Below is the summary of the results of a fair value exercise for Soft Ltd carried out at the date of acquisition: Asset Carrying value at acquisition Fair value at acquisition Notes Plant GH¢10,000,000 GH¢15,000,000 remaining life at acquisition = four years Investment GH¢3,000,000 GH¢4,500,000 no change in value since acquisition The carrying values (book values) of the net assets of Act Ltd at the date of acquisition were considered to be a reasonable approximation to their fair values. ii) The profits of Soft Ltd and Act Ltd for the year to 31 March 2024, as reported in their entity financial statements, were GH¢4.5 million and GH¢6 million respectively. No dividends have been paid by any of the companies during the year. All profits are deemed to accrue evenly throughout the year. iii) In January 2024 Act Ltd sold goods to Hard Ltd at a selling price of GH¢4 million. These goods had cost Act Ltd GH¢2.4 million. Hard Ltd had GH¢2.5 million (at cost to Hard Ltd) of these goods still in inventory at 31 March 2024. iv) All depreciation is charged on a straight-line basis. v) It is the accounting policy of Hard Ltd that the non-controlling interests in its subsidiary should be valued at a proportionate share of net assets. vi) An impairment test at 31 March 2024 on the consolidated goodwill for Soft Ltd and Act Ltd concluded that it should be written down by GH¢3,200,000 and GH¢750,000 and treated as an operating expense. No other assets were impaired. Required: a) Prepare the consolidated statement of financial position of Harden as at 31 March 2024 in accordance with International Financial Reporting Standards. (15 marks) b) Some commentators have criticized the use of equity accounting on the basis that it can be used as a form of ‘off balance sheet’ financing. Explain the reasoning behind the use of equity accounting and discuss the above comment. (5 marks)