UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING

University Examination for the Programme of Bachelor of Commerce

and Bachelor of Education [Commerce] for Academic Year 2010/2011

AC 201: INTERMEDIATE ACCOUNTING

Time allowed: 2 hours [08.00 – 10.00] Date: Friday, March 11th, 2011

Instructions to Candidates
i] There are THREE questions in this examination. Attempt ALL
ii] All answers and workings should be written in the answer book provided.
No workings should be done in the question paper at any time during the
examination.
iii] Be brief and straight to the point for theoretical questions.
iv] All questions carry equal marks. Marks for respective parts of questions
have been indicated to assist you in budgeting for your time wisely.

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Question ONE [20 marks]
For each of the questions below, choose the most correct answer and write the letter
corresponding to your choice on your answer book. [1 mark each]
1] Which of the following reports is not a component of the financial statements
according to IAS 1?
A] Statement of financial position.
B] Statement of changes in equity.
C] Director’s report.
D] Notes to the financial statements.

2] Which of the following information is not specifically a required disclosure of IAS 1?

A] Name of the reporting entity or other means of identification, and any change in
that information from the previous year.
B] Names of major/significant shareholders of the entity.
C] Level of rounding used in presenting the financial statements.
D] Whether the financial statements cover the individual entity or a group of entities.

3] Which one of the following is not required to be presented as minimum information

on the face of the statement of financial position, according to IAS 1?
A] Investment property.
B] Investments accounted under the equity method.
C] Biological assets.
D] Contingent liability.

4] When a public shareholding company changes an accounting policy voluntarily, it has

to
A] Inform shareholders prior to taking the decision.
B] Account for it retrospectively.
C] Treat the effect of the change as an extraordinary item.
D] Treat it prospectively and adjust the effect of the change in the current period and
future periods.

5] When it is difficult to distinguish between a change of estimate and a change in

accounting policy, then an entity should
A] Treat the entire change as a change in estimate with appropriate disclosure.
B] Apportion, on a reasonable basis, the relative amounts of change in estimate and
the change in accounting policy and treat each one accordingly.
C] Treat the entire change as a change in accounting policy.
D] Since this change is a mixture of two types of changes, it is best if it is ignored

6] When an independent valuation expert advises an entity that the salvage value of its
plant and machinery had drastically changed and thus the change is material, the
entity should
A] Retrospectively change the depreciation charge based on the revised salvage
value.
B] Change the depreciation charge and treat it as a correction of an error.

AC 201: Intermediate Accounting University Examination for 2010_11: Page 2 of 12

 C] Change the annual depreciation for the current year and future years.
D] Ignore the effect of the change on annual depreciation, because changes in
salvage values would normally affect the future only since these are expected to
be recovered in future.
7] An entity imported machinery to install in its new factory premises before year-end.
However, due to circumstances beyond its control, the machinery was delayed by a
few months but reached the factory premises before year-end. While this was
happening, the entity learned from the bank that it was being charged interest on the
loan it had taken to fund the cost of the plant. What is the proper treatment of freight
and interest charge under the relevant accounting standards?
A] Both charges should be capitalized.
B] Interest may be capitalized but freight should be expensed.
C] Freight charges should be capitalized but interest cannot be capitalized under
these circumstances.
D] Both charges should be expensed.

8] An entity installed a new production facility and incurred a number of expenses at the
point of installation. The entity’s accountant is arguing that most expenses do not
qualify for capitalization. Included in those expenses are initial operating losses.
These should be:
A] Deferred and amortized over a reasonable period of time.
B] Expensed and charged to the income statement.
C] Capitalized as part of the cost of the plant as a directly attributable cost.
D] Taken to retained earnings since it is unreasonable to present it as part of the
current year’s statement of comprehensive income

9] Accounting standards and accounting bases differ in that:

A] Accounting standards are broader than accounting bases
B] Accounting bases are professional interpretation of accounting principles
C] Accounting standards guide application of accounting bases
D] Accounting bases are fundamental principles, while accounting standards
provides rules

10] Challenges/ criticisms facing financial reporting include all of the following except:
A] Failure to report items incapable of financial measurement
B] Failure to provide information that guide projections of future financial
performance and position
C] Failure to report soft assets like know how and market dominance
D] Lack of real-time reporting for decision-making purposes

11] Romuli Corporation was granted a patent on a product on January 1, 2005. This
patent expires at December 31st 2018. To protect this patent, the corporation
purchased on January 1, 2011 a patent on a competing product which was originally
issued on January 10, 2006 and will expire on 31st December 2020. Because of its
unique plant, Romuli Corporation does not feel the competing patent can be used in
producing its current product. The cost of the competing patent should be

AC 201: Intermediate Accounting University Examination for 2010_11: Page 3 of 12

 A] Amortized over a maximum period of 15 years.
B] Amortized over a maximum period of 8 years.
C] Amortized over a maximum period of 10 years.
D] Amortized over a maximum period of 14 years.
E] Expensed in 2011.

12] Goodwill acquired with business should

A] Be written off as soon as possible against retained earnings
B] Be written off as soon as possible as an extraordinary item
C] Be written off by systematic charges as a regular operating expense over the
period benefited
D] Not be amortized

13] On January 2, 2010, Kibabuu Co. bought a trademark from Nyumbu Inc. for TZS
300,000,000. An independent research company estimated that the remaining useful
life of the trademark was 10 years. Its unamortized cost on Nyumbu’s books was TZS
240,000,000. In Kibabuu 2010 income statement, what amount should be reported as
amortization expense?
A] TZS 30,000,000
B] TZS 24,000,000
C] TZS 15,000,000
D] TZS 12,000,000

14] The reasons for providing general purpose financial statements to different groups of
users rather than specific financial information to each group include:
i] The cost that would be involved to tailor financial information to each user group
ii] The detailed work that would have been done by users in digesting the
information
iii] The threat that this would have caused to financial analysts and their profession
iv] Limited understanding of user-specific need for each user group.
A] i & ii
B] ii & iv
C] iii & iv
D] ii & iii
E] i & iv

15] Formulation of accounting standards emerged due to each of the following except:
A] To address the criticism towards accounting field by the public
B] Enhancement of comparability of financial information
C] Eliminate rooms for accounting discretion
D] Mitigate recurring of collapses of large and seemingly profitable/ sustainable
corporations

16] One of the benefits of global harmonization of accounting standards to reporting

entities is:
A] Lower cost of capital to entities

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B] Lower cost of compliance to entities
C] Continuous changes to the existing standards
D] Perceived difficulty of local GAAPs

AC 201: Intermediate Accounting University Examination for 2010_11: Page 5 of 12

17] In time value of money problems, an ordinary annuity differ from an annuity due in
that:
A] Deposits/ withdrawals are made at 1st January and 31st December respectively
B] Deposits/ withdrawals are made at 31st December and 1st January respectively
C] For any given number of periods and discount rate, the present value and future
value of annuity due is higher than that of ordinary annuity
D] For any given number of periods and discount rate, the present value and future
value of ordinary annuity is higher than that of annuity due

18] In financial reporting, time value of money matters most in accounting for:
A] Expenses
B] Intangibles
C] Inventories
D] Cash and other highly liquid assets

19] In accounting for impairment of assets, time value of money becomes useful in
determining:
A] Value in use
B] Net fair Value
C] Recoverable amount
D] Carrying amount

20] If the discount rate is increased, the effect on time value computations for a given
number of periods and amount is:
A] The future value is reduced while the present value is increased
B] The present value is reduced while the future value is increased
C] Both the future value and the present value increases
D] Both the future value and the present value decreases

AC 201: Intermediate Accounting University Examination for 2010_11: Page 6 of 12

 Question TWO
A] One of the concepts you learnt in intermediate accounting is impairment of assets and
its accounting treatment. Your classmate is troubled that this is a redundant treatment
and does not understand why the entity have, after going through accounting for
depreciation/ amortization, as well as revaluation, it still need to perform
recoverability test in performing impairment reviews.
Required:
i] Define impairment of assets, clearly describing the ‘recoverability test’. [3
marks]
ii] State why it is important to recognize impairment of assets, using the definition of an
asset as a justification.

[3 marks]
iii] Why is systematic depreciation inadequate for the objective in (ii) above? [2
marks]

B] Mwekezaji has an oil platform in the sea. The entity has to decommission the
platform at the end of its useful life, and the provision for decommissioning was set
up at the start of oil exploitation/oil production. The carrying value of the provision is
TZS 800,000,000. The entity has received an offer of TZS 2,000,000,000 to sell the
oil platform right and the disposal cost is TZS 100,000,000, which reflects the fact
that the owners have to decommission it at the end of its useful life. The value in use
of the oil platform is TZS 2,600,000,000 ignoring the decommissioning costs. The
current carrying value of the oil platform is TZS 2,800,000,000 ignoring the
decommissioning costs.

Required:
i] Determine whether the oil platform is impaired. [6 marks]
ii] Compute the impairment loss. [2 marks]

C] Mabahasha Ltd manufactures and sells decorated paper envelopes. The stock of 100
packs of one type of envelopes was included in the closing inventory as of December
31st, 2010, at a cost of TZS 50,000 each per pack. During the final audit, the auditors
noted that the subsequent sale price for the inventory at January 15, 2011, was TZS
40,000 each per pack. Furthermore, inquiry reveals that during the physical stock take
at 31st December 2010, a water leakage had created damages to the paper and the
glue. Accordingly, in the following week, Mabahasha Ltd spent a total of TZS 15,000
per pack for repairing and reapplying glue to the envelopes.

Required:
Calculate the net realizable value and amount written down from the inventory as a loss.
[4 marks]

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 Question THREE
A] You are a practical training (vacation) student in Minazi Mirefu plc. The company is
in the process of finalizing its financial statements for the year ending 31st December
2010.
The following extract of financial information has been provided:
2010 2009 2011 (projected)
TZS ‘000 TZS ‘000 TZS ‘000
Profit before interest and Tax (30,000) (20,000) (5,000)
Total Assets 100,000 100,000 100,000
You are further informed that the company has always had a good profit history since
incorporation, except for the last two years.
The figures given above are before including recognition of provision relating to a
court case in which the company is a defendant. The lawyers believe that TZS
6,000,000 will be enough to provide for this purpose, as the case is approaching a
conclusion sometimes in April 2011.
The Finance Director (FD), upon discussion with the company auditors, is assured
that they can provide as much as TZS 18,000,000 and still be in line with the IFRSs
as far as ‘true and fair’ financial reporting is concerned. The FD then suggests to the
Managing Director (MD) that they charge the TZS 18,000,000 rather than TZS
6,000,000 provision in the current (2010) financial year, since the extra provision can
always be released when the matter is settled.
The MD remarks, ‘we are already in for ridicule from both investors and market
competitors from the continuous losses we have been reporting of recent, why on
earth should we do that? If we are to report a loss again this year, let’s make it as low
as possible, not a shilling more. This way we would at least have ‘the lesser evil’.
The FD approaches you, knowing that you have recently studied intermediate
accounting to help clarify to the MD why charging TZS 18,000,000 provision would
be better in the eyes of investors, especially when focusing beyond the 2010
accounting period.
Required:
i] Explain briefly the (numerical) implication and justification for charging TZS
18,000,000 provision in terms of impressing investors. [5 marks]
ii] What is the name given to the practice adopted in (i) above in as far as accounting
is concerned.

[2 marks]

B] You are given the following information to enable you finalize the financial

AC 201: Intermediate Accounting University Examination for 2010_11: Page 8 of 12

 statements of Mackiros Ltd for the year ended 31st December 2010
i] At 31st December 2009 the draft financial statements contained a provision of
TZS 40,000,000 relating to potential damages arising from a court case being
brought against the company. An out-of-court settlement was reached in
February 2010 with Mackiros making a full and final payment of 26,500,000.
[4 marks]

ii] During the year Mackiros sold goods with a warranty under which customers are
covered for the cost of repairs of any defects that become apparent within 12
months after purchase. At 31st December 2010, TZS 50,000,000 of goods had
been sold and already goods worth TZS 3,000,000 had been returned for repair,
and an actual repair cost of TZS 250,000 has been spent. Experience shows that
customers take more than 9 months to return goods for repairs. Approximately 20
percent of the goods are returned and the repair costs range from 5% to 10% of
the selling price. [5 marks]
iii] The company made an offer to its customers to claim up to 10% of the purchase
price if they prove it wrong in its motto as being the company with the ‘lowest
selling prices’ in its advertising campaigns for one line of its products. TZS
700,000,000 of such line of products have been sold during the year. A quick
survey of the market prices indicates that it is highly unlikely that customers are
going to prove the company wrong. [4 marks]

Required:
For each of the above issues:
 State the accounting treatment in accordance with IAS 37 i.e. whether there
should be a provision to be recognized or a contingent liability.
 Show the journal entries where relevant.

Suggested solution and marking scheme

Question ONE [2 marks each]
1 C 6 C 11 B 16 A
2 B 7 A 12 D 17 C
3 D 8 B 13 A 18 B
4 B 9 C 14 E 19 A
5 C 10 B 15 C 20 B
Question TWO
A] Impairment of Assets
i] Definition
Impairment of assets refers to the inability of an asset to ‘recover’ its carrying amount.
To determine whether an impairment has occurred, a recoverability test is conducted,
which basically compares the recoverable amount (Higher of value in use and net fair
value) of an asset against the carrying (statement of financial position) value of the asset

AC 201: Intermediate Accounting University Examination for 2010_11: Page 9 of 12

at the date of the test. If the results are that the recoverable amount is less than the
carrying amount, the asset is said to be impaired.

ii] Importance of accounting for impairment

The definition of an asset is pegged to its ‘promise’ to the entity, in terms of future
economic benefit potential to the entity. The value reported in the statement of financial
position should therefore, aim at reflecting what the asset is ‘promising’ to the entity. If
therefore, the asset’s carrying amount is greater than its recoverable amount, it is actually
promising more than it can actually fulfill, and thus calling for recognition of impairment
loss, to replace the false promise with a realistic promise.

iii] Inadequacy of systematic depreciation

Systematic depreciation is, by definition, a means to match assets’ cost with revenue
generated by them, through allocation of such ‘sunk’ cost over the useful life of an asset.
It thus looks at the cost of the asset, useful life and residual value, rather than looking at
the asset in terms of what it promises. This means it cannot achieve to conserve the
‘promise’ that the asset literally makes to the entity.

B] Mwekezaji
i] Recoverability test
Carrying amount = 2,800,000,000 – 800,000,000
= 2,000,000,000

Recoverable amount:
Net fair value = 2,000,000,000 – 100,000,000
= 1,900,000,000
Value in use = 2,600,000,000 – 800,000,000
= 1,800,000,000
Recoverable amount is higher of the two = 1,900,000,000
Since Carrying amount (2,000,000,000) is higher than the recoverable amount
(1,900,000,000), the oil platform is impaired.
ii] Computation of impairment loss
Impairment loss = Carrying amount – recoverable amount
= 2,000,000,000 – 1,900,000,000
= 100,000,000

C] Mabahasha Ltd
Net realizable value = estimated selling price – costs necessary to sell the inventory.
= 4,000,000 – 1,500,000
= 2,500,000
Amount to be written down = original carrying amount – Net realizable value
= 5,000,000 – 2,500,000
= 2,500,000

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Question THREE
A] Minazi Mirefu plc
i] Numerical implication and justification
If TZS 6,000,000 provision is charged
2011
2010 2009 (projected)
Profit before interest and Tax (36,000) (20,000) (5,000)

If TZS 18,000,000 provision is charged, the loss for 2010 will be greater, i.e. TZS
48,000,000, but the extra provision (TZS 12,000,000) will be released in 2011, leading
to a TZS 7,000,000 profit as opposed to the projected TZS 5,000,000 loss
2011
2010 2009 (projected)
Profit before interest and Tax (48,000) (20,000) 7,000

The justification of this approach (as long as it is within the standards) is that TZS
36,000,000 loss is already ‘bad news’ to investors and the entity can tolerate a little bit of
more criticism with a TZS 48,000,000 loss, which is a bit worse, but the payoff is that,
other factors being equal, they stand to give ‘good news’ in 2011 by reporting a
turnaround profit.

ii] The name of the approach

This is a creative accounting technique known as ‘big bath’ accounting, where the 2011
financial statements are given a ‘big bath’ to cleanse them of the loss using the provision
released.

B] Mackiros Ltd
i] Out of court settlement
T.he amount paid (TZS 26,500,000) should be offset against the provision during 2010.
The extra provision i.e. TZS 13,500,000 should be released to P/L during 2010
The Journal entries should be:
Dr Provision 40,000,000
Cr Cash/claimant 26,500,000
Cr Other income 13,500,000

ii] Repairs warranty

A provision need to be created for the possible return of further TZS 7,000,000 worth

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 of goods i.e. 20% of TZS 50,000,000 – 3,000,000.
This provision will approximately be TZS 525,000 (i.e. 7.5% of TZS 7,000,000
Alternatively, A full provision of TZS 750,000 (7.5% X 20% X TZS 50,000,000) less
TZS 250,000 already spent, which will be TZS 500,000
Journal entry
Apart from the entry that must have been made for the amount already spent, a year-
end entry for provision will be:
Dr Repairs cost 500,000 (525,000)
Cr Provision for repairs cost 500,000 (525,000)

iii] Lowest price guarantee

The obligation of up to TZS 70,000,000 (10% of TZS 700,000,000) exists but it is remote
(highly unlikely). This is therefore a contingent liability that does not even warrant a
disclosure in the notes.

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