FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING

QUALIFICATION CODE: 07 BOAC LEVEL: 7

COURSE CODE: GFA 711S COURSE NAME: FINANCIAL ACCOUNTING 310

SESSION: Semester 1, 2021 PAPER: THEORY

DURATION: 2 Hours MARKS: 60

TEST 2 QUESTION PAPER

th
DATE AND TIME 8 MAY 2021, 0800-1000 hours
EXAMINER(S) Daniel Kamotho
MODERATOR: Andrew Simasiku, Mercy Haindura

INSTRUCTIONS
1. This test paper is made up of two (2) questions
2. Answer both Question in blue or black ink
3. Start each question on a new page in your answer sheet & show all your workings
4. Questions relating to this paper may be raised in the initial 30 minutes after the
start of the paper. Thereafter, candidates must use their initiative to deal with any
perceived error or ambiguities & any assumption made by the candidate should
be clearly stated.
5. Ensure your Student No is correct and correct grouping and lecturer’s name are
indicated on your answer script – there will be 10% marks deduction for non-
compliance.
PERMISSIBLE MATERIALS
1. Nonprogrammable calculators
2. Test question paper and script

THIS QUESTION PAPER CONSISTS OF 5 PAGES (including this cover page)

1
QUESTION 1 (30
marks)
Delta Limited (Delta) prepares its financial statements to 30 September each year. The
financial statements for the year ended 30 September 2020 are shortly to be authorised for
issue. The following events are relevant to these financial statements:

Delta operates a defined benefit retirement benefits plan on behalf of current and former
employees. Delta receives advice from actuaries regarding contribution levels and overall
liabilities of the plan to pay benefits. On 1 October 2019, the actuaries advised that the
present value of the defined benefit obligation was $60 million. On the same date, the fair
value of the assets of the defined benefit plan was $52 million. On 1 October 2019, the
annual market yield on high quality corporate bonds was 5%, 10% on 30 th September 2020
while the average for the year was 8%.

During the year ended 30 September 2020, Delta made contributions of $7 million into the
plan and the plan paid out benefits of $4·2 million to retired members. You can assume that
both these payments were made on 30 September 2020.

The actuaries advised that the current service cost for the year ended 30 September 2020
was $6·2 million. On 31 August 2020, the rules of the plan were amended with retrospective
effect. These amendments meant that the present value of the defined benefit obligation was
increased by $1·5 million from that date.

During the year ended 30 September 2020, Delta was in negotiation with employee
representatives in their hospitability division regarding planned redundancies occasioned by
the low business following the Covid epidemic. The negotiations were completed shortly
before the year end and redundancy packages were agreed as follows.

Employees of 60 years and older at the date of restructuring were forced to retire
immediately. These employees were paid out an amount equal to six months' salary as a
lump sum.

All other employees had a choice to either immediately leave the employment of the
company after receiving a lump sum equal to three months' salary or stay in the employment
of the company after receiving a lump sum equal to 10% of their annual salaries (including

2
bonuses) before restructuring and reducing their future monthly salaries to 80% of their
former salaries as they move to other departments.
The results of the restructuring agreement with the union were as follows:
 Three employees with an average monthly salary of N$35 000 were 60 years and
older. The total annual salaries, including 13th cheques, of all other employees in the
hospitality division (15 of them) was N$ 5.4 million.
 Of the 15 remaining employees, 10 employees with an average salary of N$32 000
per month chose to leave the employment of the company. The lump sums were paid
out on 10th October 2020.
No entries regarding the lump sums had been passed to the ledgers as of 30 th September
2020.

The retrenched employees (13 in total) would also obtain their accrued pension benefits
from the pension fund benefits as follows:
 Before 30 September 2020, Delta made payments of $7·5 million to the employees
affected by the redundancies in compensation for the curtailment of their pension
benefits. These payments were made out of the assets of the retirement benefits
plan and are not included under the termination lump sums.
 The impact of these redundancies was to reduce the present value of the defined
benefit obligation by $8 million.
No entries in regard to the post-employment benefits paid to the retrenched staff was posted
as of 30th September 2020.

on 30 September 2020, the actuaries advised that the present value of the defined benefit
obligation was $68 million. On the same date, the fair value of the assets of the defined
benefit plan were $56 million.

As at 30 September 2020, the following employee benefits had been paid and correctly
recorded in the financial statements.
 Salaries and Wages- N$ 57 000 000.
 Medical benefits - N$ 3 000 000.
 Long service awards- N$ 50 000.

3
REQUIRED
a) Determine the amounts that will be recognised in the Statement of profit and Loss
and other Comprehensive Income and the Statement of Financial Position of Delta
Limited as of 30 September 2020 in respect of post-employment benefits and
termination benefits as of 30 September 2020. (7
Marks)

b) Record the above transactions using Journal entries relating to the Termination and
the Defined Benefits Plan. The accounts must show the respective statement i.e.,
SPL, SFP, SCO, SCE, SCF. Please note that narrations are required.
(13Marks)

c) Show how Delta would disclose its employee benefits costs in the SPLOCI and SFP
as of 30th September 2020. Ignore accounting policy notes and descriptions of the
DB pension fund. (8
Marks)

Presentation and Neatness (2 marks)

Total for Question 1 (30 marks)

QUESTION 2 (30
marks)
Westvane pty reported profits of N$460,000 for year ended 31 March 2020.On 1 April 2019,
its capital structure consisted of 5.0 million equity shares of N$0.5 each, and 300,000 16%
preference shares of N$2 each. The preference dividend was paid during the year. An
ordinary dividend of N$60,000 was also paid during the year. Neither dividend has been
taken account of in the above profit figure. The reported basic earnings per share for year
ended 31 March 2019 was 4c and diluted EPS was 3.6c per share.

During the year ended 31 March 2020, the following changes took place to the issued share
capital of Westvane pty:

4
  _ 1,000,000 equity shares were issued in conjunction with the acquisition of another
business. These were issued at full market price at the date of issue, 1 July 2019.
 _ To help fund expansion of the business, 3.6 million ordinary shares were issued for
cash to existing shareholders on 1 September 2019. The issue price was N$0.70 per
share, which represented a discount of 32c on the traded price immediately before
the issue, which was N$1.02.
 _ On 31 March 2020, a bonus issue was completed of one share for every two held
at that date.

In addition, the following information is relevant in regard to share options held by

management

 500,000 share options were held by as of 01 April 2019 and of which 60% are
convertible to equivalent number of ordinary shares as at 30th March 2021 while the
remaining 40% are convertible on 31st March 2022.
 An additional 500,000 shares were awarded during the year ended 31st March 2020
and are convertible to ordinary shares (1 for 1) on 31st March 2023.

REQUIRED
a) In another entity’s recent financial report, you noticed that profit for the year
increased from N$300,000 to N$500,000, yet the basic EPS increased from 30c to
just 36c. Identify and explain potential reasons for this. (4
marks)
b) Briefly explain why EPS is considered an important measure of a company’s financial
performance and briefly explain some of the limitations of EPS. (6 marks)
c) From the information above, calculate the basic Earnings Per Share (EPS) and
Diluted Earnings per share of Westvane pty to be reported in the financial statements
for year ended 31 March 2020. Show also the recalculated comparative figure for the
preceding year 2019. (12
marks)
d) Show how the earnings per share information will be disclosed in Westvane pty
financial statement for the year ended 31 March 2020 in accordance with
International Financial Reporting Standards.
(8 marks)

END OF QUESTION PAPER

5
6
Suggested solution 1

a
Delta Ltd
General Journal for the reporting period ended 30 September 2020
Credit N$ Mark
Account Name Debit N$ 000 000 s

30-Sep-20 Plan Asset - SFP 2,600 0.5

Interest Income- SPL 2,600 1

Recognition of expected return on Paln Asset - 52000@5%

30-Sep-20 Interest expense -SPL 3,000 0.5

Plan Obligation - SFP 3,000 1

Recognition of interest expense on Plan Obligation - 60000@5%

30-Sep-20 Plan Asset - SFP 7,000 1

Bank Account - SFP 7,000 1

Recognition to payments made to the fund by the company

30-Sep-20 Plan Obligation - SFP 4,200 1

Plan Asset - SFP 4,200 1

Recognition to payments made to the fund to the members

30-Sep-20 Employee expenses - SPL 1,500 1

Plan Obligation - SFP 1,500 1

Recognition of past service costs

30-Sep-20 Plan Obligation - SFP 8,000 1

Plan Asset - SFP 7,500 1

Gain on DBP resulting from redundancy - SPL 500 1

Recognition to payments made to the redundant staff and gain on pension
curtailment

30-Sep-20 Employee expenses- SPL 6,200 1

7
 Plan Obligation - SFP 6,200 1
Recognition of current service cost

31-Dec-20 Plan Asset - SFP 6,100 0.50

Excess return on Plan Asset- OCI 6,100 0.50

Recognition of Excess return on Plan Asset

Acturial Loss on Plan Obligation - OCI 9,500 0.50

Plan Obligation - SFP 9,500 0.50

Recognition of acturial valuation Loss

Termination benefits - Over 60 years- SPL 630,000 1

Termination benefits - 10 staff under 60- SPL 960,000 1

Salaries and Wages - for remaining 5 Staff - SPL 156,000 1

Accrued employee benefits- SFP 1,746,000 1

Accrued Accrual of benefits payable to employees on restructuring

Statement of comprehensive income –

N$
b Employee benefits expense
Termination benefit 1,590,000 1
Service costs 6,200,000 1
Past service costs 1,500,000 1
Gain on curtailment of Plan - 500,000 1P
Net Interest on the net defined liability (asset) 400,000 1P
9,190,000

Other Comprehensive Income

Actuarial gain on plan liabilities 6,100,000 0.5
Deficiency on return on plan assets - 9,500,000 0.5
- 3,400,000 1P

Statement of Financial Position as at 31 December 20.2

Pension Fund Obligations
68,000,000
Pension Fund Assets
56,000,000
Net Liability
12,000,000 1

8
 28
Journal Narrations 1
Presntation and Neatness 1
TOTAL 30

Suggested solution 2

(a)

This illustrates the power of EPS as an indicator of performance.

Profit has gone up by 66.7% yet the EPS went up by just 20%.

This could only have happened due to an increase in the number of shares. (1)

This could be due to either

 a bonus issue or (1)
 an issue for cash. (1)

 It could also arise due to the conversion of another instrument into equity shares, (1)
or

 the exercise of share options. (1)

Any 4 = 4 marks

b)
Most stock market investors pay close attention to the EPS figure as it measures the
earnings of the company in terms of each unit of ownership. (1)

This is most relevant to an investor as it controls for issue or redemption of shares by the
entity. (1)

In addition, it is an intuitive measure, being easy to understand. (1)

It is widely quoted in the press. It forms the denominator for the P/E ratio, an important
measure of an entity’s value. (1)

Its calculation is standardised by IAS 33, validating comparisons across different entities. (1)

It does have several limitations.

It includes one-off items such as exceptional write-offs etc. (1)
This can impair its usefulness as a predictor of future results. (1)

Also, it does not include other comprehensive income, for example revaluation gains. OCI is
arguably important as it adds value to an equity investment. (1)

9
However, it is excluded on the grounds that it is not yet realised.

However even when it is realised (for example on subsequent disposal of the asset) the
gains do not find their way into the EPS figure. (1)

Many investors get round these limitations by calculating their own version of EPS in
addition to IAS 33 EPS. (1)

It is therefore important that financial reports give users sufficient information to enable them
to do this if they wish. (1)
Any 6 = 6 marks

(a) EPS consists of two figures,

(1) Earnings relevant to equity shareholders, and

(2) weighted average number of equity shares in issue for the period.

Basic EPS - The bonus fractions are applied to periods prior to the relevant share issue only.

Date Shares in Bonus Weighting No. of shares

existence adjustors
Apr 1 – Jun 30 5,000,000 1.02 / 0.9 * 3/2 3/12 2,125,000√

Jul 1 – Aug 31 6,000,000 1.02 / 0.9 * 3/2 2/12 1,700,000√

Sept 1- Mar 31 9,600,000 3/2 7/12 8,400,000√

√ correct no of √ P correct √ P correct

shares factors weightings
Total weighted average 12,225,000√
Dividends for PS = 300,000*2*16% 96,000√
Basic - EPS for year ended 31 March 2020 = N$364,000 / 12,225,000 2.9c√
Restate comparative EPS: 4c * 0.9/1.02 * 2/3 2.4c√

Diluted EPS
Total weighted average 12,225,000
POS at 31 March 1,000,000√
31 March 2020 POS (Issued shares + POS) = 13,225,000√
Diluted EPS =364000/13,225,000*100 2.8c√
Total issued shares in 2019 Unadjusted 5,000,000
Adjustment for Bonus issues and right issues in 2020 3,500,000
Total equivalent issued shares as at 31 March 2019 8,500,000
Earnings for 2019 = .04*5000000 200,000√
POS as at 31 Marc 2019 500,000√
Issued and POS as at 31 March 2019 9,000,000
Restate comparative diluted EPS: 36c*0.9/1.02*2/3 2.1c √

Calculation of TERP ( 3 marks in total )

10
3600000*0.7= 2520000
6000000*1.02 =6120000

TERP = 8640000√ /9600000√ = 0.9√ P

Max 19
Available 13

Earnings for the year here are N$460,000. We must subtract the preference dividend from
this figure, as this portion of profits must be paid to them, therefore it is not relevant to the
equity holder. Equity dividends are NOT subtracted as these form part of the equity
shareholders’ return.

WESTVANE PTY
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020√

Note 2020 2019

Cents Cents
Basic earnings per share 8 2.9√ P 2.4√
Diluted earnings per share 8 2.8 √ P 2.1√

Reconciliation of weighted average number of ordinary shares 2020

outstanding
Used in the calculation of basic earnings per share 12,225,000√
Notional shares in respect of share options held by MGT 1,000,000√

Used in the calculation of diluted earnings per share 13,225,000√ P

AVAIBALE 8
MAX 8

Additional notes for students NOT REQUIRED-

WESTVANE PTY

11
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2020

Note 8. Earnings per share

Basic earnings per share is based on earnings of N$412,000 (2019: N$ 200,000) and a
weighted average number of ordinary shares of 11 875 000 (2019: 8 500 000) in issue
throughout the year after adjusting for a capitalisation issue.

Diluted earnings per share is based on earnings of N$ 412 000 and a weighted average of
12 875 000 shares in issue. The reason for the dilution is 1 000 000 options granted to
management to be exercised by various date for Nil consideration

Basic earnings are equivalent to diluted earnings as only the incremental shares issued for
no consideration are considered.

Hence the correct earnings figure for EPS purposes is

N$460,000 – (300,000* 2 * 16%) =364,000

The weighted average number of equity shares in issue must consider the changes that
happened during the year. These were the issue at full market price, rights issue at a
discount and bonus issue.

Every time there is a bonus issue (shares issued for free), the earning power of issued
shares declines, as more shares exist to share in the same resources of the business.

If shares are issued at a discount, this is equivalent to a partial bonus issue, as the average
earning power of each share declines here also, although not by the same degree.

Hence, we must adjust for this effect in our calculations. As the effect of a bonus issue is
permanent, in order to have valid comparisons we must adjust comparative figures to the
new reality. We use bonus fractions for these adjustments. A bonus fraction quantifies the
amount by which the value per share has been reduced by increasing the number of shares
to share in a given business.

For a pure bonus issue, the bonus fraction = (No. of shares after bonus issue / No. of shares
before bonus issue). Here, as the bonus issue is one new share for every two held, the
bonus fraction is 3/2

For a rights issue, we must compute the bonus fraction based on relative valuations, before
and after the rights issue. The value before the issue will be a market fact. Here it is N$2.04.
The value after will be an average of the existing price and the price of the new shares
issued. Here, there were 3 million shares in issue on the date of the rights issue. 1.8 million
further shares were issued at the discounted price.

12
Hence the average value per share after the rights issue is (6 million * N$1.02) + (3.6 million
* 0.70) / 9.6 million (new total no of shares). This is called the theoretical ex-rights price and
works out at N$0.9. Therefore, the bonus fraction is 1.02/0.9

13